MediaLab Europe, the flagship digital research institute set up in Dublin by the State at a cost of €35 million, is to close with the loss of up to 50 research jobs after just five years in operation.
The board of MediaLab Europe took the decision yesterday following the failure of negotiations between the institute's principal stakeholders, the Government and Massachusetts Institute of Technology (MIT), to agree a financial rescue package.
MediaLab Europe had asked the Government to provide an extra €9 million to fund its running costs following its failure to attract enough corporate sponsorship.
But MIT and the Government failed to agree the terms of a restructuring of its operations which would have given the State a greater say in its decision-making.
The closure of MediaLab Europe, which was established as the anchor tenant of the Government's "digital village" in the Liberties area of Dublin, is a major blow to the Government.
The research institute was a pet project of the Taoiseach, Mr Ahern, who strongly promoted the project despite warnings from his officials that the State may have to bail out the institute if its business model failed.
Last May it became clear that MediaLab Europe's sole reliance on corporate funding to meet its running costs would not work.
Despite attracting sponsorship from the likes of Eircom, the BBC and the mobile phone firm Orange, the global downturn in the technology industry forced it to look to the State for more cash.
MediaLab Europe focused on undertaking fundamental research into digital technologies, which was not led by purely commercial goals.
About 50 researchers and administration staff will lose their jobs due to the closure, and many other people are involved in collaborative research involving other colleges and institutions.
The Minister for Communications, Mr Dempsey, said last night the Government would establish a new digital research institute in the Digital Hub that would be more commercially focused.
He said the State would provide €3 to €4 million a year to meet its annual running costs.
"MediaLab Europe was a risk that was worth taking but just didn't work out.
"In areas like ICT and telecoms, you have to take risks to succeed,." Mr Dempsey added.
The Government says it remains committed to the Digital Hub project, which has attracted about 40 companies to the Liberties. It is also involved in about 20 education projects in the area.