LONDON (Reuters) - The British government canceled plans to fund a carbon capture and storage (CCS) demonstration project at Longannet in Scotland, signaling the technology remains too costly and undermining Britain's ambition to become a clean technology leader.

"A decision has been made not to proceed with Longannet but to pursue other projects with the 1 billion pounds ($1.5 billion) funding made available by the government," the Department of Energy and Climate Change (DECC) said in a statement Wednesday.

CCS is still a commercially unproven technology but is widely seen as a key mechanism to fight climate change by trapping and burying greenhouse gas emissions, while maintaining stable energy supply.

The government said it plans to use the money to fund other CCS projects following the launch of a new bidding process in England and Scotland.

Ministers will meet industry leaders in a forum on November 2 to discuss further steps, DECC said.

"At a time when North Sea revenues are coming in at record levels, it was surely not too much to expect that the Treasury would make the necessary funding commitment for Longannet to go forward," said Scotland's First Minister Alex Salmond, who supported the Longannet CCS project.

"The cost would have been less than a tenth of this year's alone estimated North Sea revenues of 13.4 billion pounds."

A source close to the talks between Longannet developer Scottish Power, owned by Spain's Iberdrola, and the government said two weeks ago the two parties were unable to agree on how much up-front funding the government should provide, stalling negotiations.

The Longannet coal-fired power station has a capacity of 2,400 megawatt (MW) and is Britain's second-largest coal-fired power plant behind Drax's 3,900 MW power station in Yorkshire.

"This announcement is very frustrating and damaging for the credibility of the UK CCS demonstration program," said Nick Molho, head of energy policy at WWF-UK.

The UK plans to become a world leader in clean energy technology, and CCS is central to plans to reduce carbon emissions.

But tough government spending cuts to curb sovereign debt have made it difficult for the state to commit huge sums of state money to new technologies. ($1 = 0.639 British pounds)

(Reporting by Karolin Schaps, Henning Gloystein and Oleg Vukmanovic, editing by Jane Baird)