European funding from the Objective One and Objective Two programmes must be returned after failing to be spent.
The under-spend runs to £126m for Merseyside's £1bn Objective One programme, which ran for seven years from the start of 2000 to the end of 2006.
The £500m Objective Two programme, for slightly less deprived areas including parts of Greater Manchester, Lancashire, Cheshire and Cumbria under-spent by £76m in the same period.
There was an additional two years, to the end of 2008, to finish spending allocated grants. The DCLG declined an offer by Brussels to extend the spending deadline. The move has shocked local politicians and regeneration managers.
Cllr Flo Clucas, deputy leader of Liverpool City Council and European programme committee member, said she was "deeply concerned" by the Government's decision and vowed that the city region's councils would be asking for the money back.
Both programmes were administered by the Government Office for the North West, answerable to the Department for Communities and Local Government.
The North West under-spend was by far the largest of any of the nine English regions; the total amount of unused funding was £671m. The devolved administrations for Northern Ireland, Wales and Scotland can still claim unused aid.
Objective One status was awarded to areas with less than 75% of average European GDP. EU funding still exists in the North West, worth around £100m a year, but is now administered by the North West Development Agency from a single pot, replacing Objective One and Two.
All parties declined to comment.