Plans to build what would have been California's first major studio since the Depression have been scrapped in a move that has sent shockwaves through the industry.

The decision by Steven Spielberg's DreamWorks production company will cost thousands of potential jobs at a time when Hollywood is already fearful because of the multimillion-dollar departure of economy-conscious new productions to Canada.

News of the decision was announced in a terse statement by Jeffrey Katzenberg, who with David Geffen and Mr Spielberg was one of the three founders of DreamWorks.

"It is clear that the move is no longer in DreamWorks' best interests," said Mr Katzenberg. "The move was simply not meant to be."

Mr Spielberg said that they were still anxious to build their own studio, which had been one of the reasons for establishing DreamWorks.

Plans to build the $250 million studio at Playa Vista, near Los Angeles airport, have been under way for more than four years. The studio would have brought in around 4,000 film industry jobs and twice that number in construction work.

That the project would have been constructed on the Los Angeles area's last remaining wetlands had provoked protests from 90 environmental and residential groups.

A report issued last month showed that $2.8 billion worth of film and television money and 23,000 jobs had crossed the border to Canada last year in order to benefit from production costs which are at least 25 per cent less than Hollywood's. Salaries for technicians are lower over the border, and the Canadian government offers tax breaks.