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Queenstown Lakes Mayor Clive Geddes says the council has no funding to contribute towards the proposed Round the Mountain cycle trail, nor had it expected to have to provide any.
Mr Geddes was asked if the Queenstown Lakes District Council (QLDC) had resources to tap into if the Government failed to honour its pledge last July to pay for the "quick-start" construction of the trail this summer.
The trail was one of seven potential trails around New Zealand.
"Southland District Council [SDC] sought QLDC support for their Round the Mountain Trail bid on the basis that their understanding from central Government was that the project would be fully funded," Mr Geddes said.
"My understanding from Mayor Frana Cardno is that SDC have now been advised that the project will not be fully funded, nor will it be built to the standard first expected."
Both mayors angrily criticised the Government's alleged backtracking on "substantial funding" for the trail this week.
The mayors said the trail was expected to cost as much as other proposed trails throughout the country and would create jobs and benefit economies of small communities on the route.
Their councils were now being told to save money and find other funding for the earmarked 175km trail between Queenstown and Kingston via the Mavora Lakes.
"We don't want a second-rate product. It must not be compromised," Mr Geddes said.
Mrs Cardno was concerned the ongoing delays would mean construction savings might be missed and contractors unavailable.
"The South is also seeing a rise in unemployment at the moment and we want to be involving youth in helping to build this trail, as per the Prime Minister's initiatives.
"We feel utter frustration at this, and are sure the community does too, as we are virtually ready to start and have it opening next year."
Venture Southland community development and events group manager Rex Capil, of Invercargill, said cycle trail programme manager John Dunn "indicated the Ministry [of Tourism] wanted to work closely with Venture to explore options for alternative funding, including sponsorship."
Following repeated telephone calls, the ministry reiterated in a statement yesterday the cycle trail project was a "partnership arrangement" between the Government and regions, with funding for the tracks being shared.
"The cycle trail fund is a limited contestable fund," Mr Dunn said in the statement.
"The Government is looking for proposals that reflect a strong regional partnership approach and a commitment to co-funding, such as sponsorship.
The level of funding for a specific trail project will be decided on a negotiated basis with the applicant."
A number of the "quick-start" projects, including Around the Mountain, were at the feasibility stage.
Mr Capil said he believed the mayors' interpretation of the Government as backtracking was fair.
"I understood a substantial amount would come from the Government and to me a substantial amount is far more than 50%."
Venture continued to work with the Queenstown Lakes and Southland district councils, the Department of Conservation (Doc) and about nine private landowners on the project, Mr Capil said.
Construction opportunities to make the most of the summer were diminishing, although the aim remained to start work this season.
Construction progress also depended on the publicly notified consent processes with both councils.
"We're still in the process of completing the business case report, which is required by the Ministry of Tourism. As part of that we still have work to do in finalising the actual route and engineering requirements.
"The report will be three weeks away."
Venture and the Doc Southland Conservancy will look at the route next week, which will determine costs.
There was no accurate cost for the cycle trail yet, Mr Capil said.