The proposed overhaul of the area cost adjustment, which distributes £1.5 billion of grant to compensate councils in London and the south-east for higher employment costs, will be postponed because it has failed to win backing from councils.
The DoE said any changes would need widespread council support before being implemented.
But the Association of Metropolitan Authorities last week decided not to back the changes put forward by a independent study of the formula by Aberdeen University.
A resolution issued by the AMA 'noted' that the study had failed to meet its terms of reference that the ACA should be conceptually sound and command the widest possible acceptance among councils.
The proposals have sparked protest from northern councils because some south-east councils would gain more grant.
The Association of County Councils voted last month to oppose the changes, creating a split in its ranks (LGC, 2 August).
Only the Association of London Government has come out in favour of the proposed change to the distribution mechanism.
But it also asked for a moratorium until 1998-99 to allow technical issues to be resolved.
The Association of District Councils is due to meet next week to decide whether to back reform.
It is understood they are likely to oppose change based on the current proposals.