Campaigners in Leicestershire today challenged the Co-op to "admit they were beaten" after the Government threw out proposals for Pennbury.

Not only did Co-op Estates' proposed 15,000-home development not make the shortlist for Britain's first environmentally-friendly towns, announced yesterday, it failed to make a "second wave" of projects assessed as needing more work before being considered again.

That means its only chance would be by winning the backing of local authorities – which have been among the plan's fiercest critics.

Dr Kevin Feltham, chairman of Campaign Against the Co-op Eco Town (Cascet), said: "This is a great victory for us and our campaign. Our aim is now to get the Co-op to withdraw from the eco-town process completely. It should admit when it is beaten."

Pennbury was proposed for land between Stoughton, Great Glen and Oadby more than two years ago.

At the time, eco-towns were a flagship Government programme to tackle climate change and meet housing needs, but Pennbury – to be built on acres of fields – was controversial from the start.

Villagers and residents of neighbouring towns organised demonstrations, campaigns, rallies and public debates.

The Co-op proposed schools, affordable housing, workplaces, health centres, allotments, community orchards, shops, post offices and green spaces.

But yesterday the Department for Communities and Local Government said it did not believe Pennbury's location was "currently possessing potential for an eco-town".

Its final appraisal found there were too many doubts about whether the road network could cope, the proposed transport infrastructure and problems attracting employers to the area – the main criticisms made by Leicestershire County Council.

Its key conclusions were:

It would cause congestion as the road network was not able to cope with the extra traffic.

It was unclear how it would deliver its pledge of providing jobs in the eco-town for people who lived there.

The eco-town posed a threat to regeneration in Leicester by drawing money away from the city.

There were fears about potential increased flood risks.

Oadby and Wigston borough and Leicestershire county councils objected to the plan and Harborough District Council raised concerns. The only authority to support the proposal was Leicester City Council after Co-op Estates said a tram into the city was a key feature.

Yesterday, campaigners and MPs highlighted the opposition by handing in a 15,000-name petition at 10 Downing Street.

Harborough MP Edward Garnier said: "This is a great day and the culmination of two-and-a-half years of hard work for many people. But we must guard against complacency because I am in no doubt Co-op will use its vast resources to try again. It is the third time it has tried to build here. I believe it will try a fourth."

Leicester East MP Keith Vaz and Leicester South MP Sir Peter Soulsby were also at Downing Street. Mr Vaz said: "This is a victory for the people and a victory for common sense. So many people opposed the eco-town that to implement it would have been extremely ill-advised."

Sir Peter said: "I am ecstatic. But the city council should not have backed it. It would have damaged the city in terms of transport and regeneration, but it was seduced by the tram."

Rutland and Melton MP Alan Duncan said: "I congratulate all the campaigners who have been fighting hard for this result and particularly the work of Cascet."

Graham Stocks, of the Campaign to Protect Rural England, said: 'We accept this decision with guarded caution, though we are naturally very pleased that a large extent of east Leicestershire's beautiful and agriculturally productive landscape is no longer under immediate threat of rampant development."

Councillor John Boyce, leader of Oadby and Wigston Borough Council, said: "The announcement shows that common sense has prevailed."

Ross Willmott, leader of Leicester City Council, was disappointed, but said that building on the land was bound to happen eventually.

He said: "I'm not surprised by the announcement, given the scale of the undertaking. It's going to happen one day because of the overwhelming need for it."

The successful eco-town sites were Whitehill-Bordon in Hampshire, St Austell in Cornwall, Rackheath in Norfolk and North West Bicester in Oxfordshire.

Eco-town chief civil servant Henry Cleary told the Leicester Mercury that these had been pursued because of their high green standards and council backing.

Ruaridh Jackson, Co-op Estates' head of planning, said it would continue to work on its plans.