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An engineering firm's expansion plans, which would have created 180 jobs, have been halted after the government cancelled an £80m loan.

The previous government pledged the cash to Forgemasters, so the Sheffield company could build parts for nuclear power stations.

Forgemasters said the plans would have created skilled jobs and the news was a "huge disappointment".

The coalition government has been reviewing Labour's spending decisions.

The Forgemasters loan is the largest sum awarded to a single organisation to be cancelled by the new government.

Announcing the loan in March, the former Business Secretary Lord Mandelson said it would make Forgemasters one of two plants in the world able to make large forgings for the nuclear energy industry.

Union leaders had written to Business Secretary Vince Cable, urging him to honour the loan.

The union said withdrawing the loan would cost jobs and jeopardise Britain's preparations to build a new generation of nuclear power stations.

Graham Honeyman, Forgemasters' chief executive, said: "Today's government announcement to overturn the loan offered to Sheffield Forgemasters' plans to install a 15,000-tonne press is a huge disappointment to all at the company.

"While the press would have placed the company at the forefront of civil nuclear manufacture, it is important for us now to focus on other elements of the company's development.

"The government clearly has a remit to reduce spending and cut the economic deficit and it is for them to decide how best to do that.

"Sheffield Forgemasters will continue to develop its significant involvement into civil nuclear, thermal and hydro power generation markets and seek other ways to develop the business."

Energy Minister Charles Hendry said: "Withdrawal of this loan is no reflection on the company, the project, its management or staff, or on our intention to remove unnecessary barriers to new nuclear [power stations] in the UK.

"In these difficult times, tough decisions have to be made across government. This is one such decision."

Energy Secretary Chris Huhne said it seemed like "a very strong commercial deal" adding: "I don't see any reason why it shouldn't be able to be financed from financial markets.

"I believe that company can go ahead with that project."

Deputy Prime Minister Nick Clegg, a Sheffield MP, said in a statement that he regretted the government "cannot afford to support its expansion" but added that "the truth is that this loan was promised by the outgoing Labour government as a calculated ploy to win support in Sheffield just ahead of the election".

Sheffield Central Labour MP Paul Blomfield said: "Scrapping the loan to Forgemasters is a kick in the teeth not just for Sheffield but for the whole of British manufacturing."

He added: "The Lib Dem and Tory government has cost Sheffield news jobs and growth, and people will remember this for a long time. It's a disastrous day for Sheffield."

The announcement comes a day after a man died following an industrial accident at the Forgemasters site.

A £13m project by regional development agency Yorkshire Forward to develop the former Outokumpu steelworks site in Sheffield has also been cancelled.

Its executive director of environment Jan Anderson said: "The decision was "a disappointing one."

The government has also announced the suspension of £12m of funding towards the Sevenstone retail development in Sheffield.