Legacy has lost its status as preferred bidder to buy the dome from the government in the latest twist to the long-running saga.

The process has now been opened to other interested parties including former boss of the attraction, Pierre Yves Gerbeau, following his sustained media campaign.

The announcement followed a meeting between senior cabinet ministers on Thursday at which they had originally been expected to rubber-stamp the Legacy bid. The decision follows reservations on whether Legacy could deliver which had been voiced by John Prescott and the site's owners English Partnership.

Legacy, the property development company owned by millionaire Labour donor Robert Bourne, failed to meet the government's Wednesday deadline to finalise their £125 million deal. The company has been given an extension by the government to secure further financial backing, though the company claims it needed more time to finalise paperwork.

In answer to a Parliamentary question local government and regions minister Hilary Armstrong and Lord Falconer issued a joint statement: "Legacy's preferred bidder status gave them exclusive negotiating rights up to 14th February. While their bid has made progress towards meeting the preferred bidder terms, they have not met them. Legacy's exclusivity has therefore expired and the government has decided to terminate the existing competition.

"During the period of Legacy's preferred bidder status, the government has not sought any alternative proposals for the Dome. The government would now like openly to test the market and will therefore ask English Partnerships to invite any interested parties to lodge with them expressions of interest for the Dome and the regeneration of the peninsula. The government, like the Mayor of London and the London Borough of Greenwich, believes the Dome should be retained as part of the regenerated peninsula, and offers will be invited on this basis. There have been considerable expressions of interest from other parties which have been logged by English Partnerships.

"Within this framework, Legacy will of course be able to put forward their proposals which will be fully considered on merit alongside others. Expressions of interest will be assessed by an advisory team, which will report to English Partnerships. They will shortly publish details of the arrangements and rules for this process."

PY Gerbeau is now in the running with his plans to turn the Greenwich site into an entertainment venue and includes James Palombo, the man behind the Ministry of Sound nightclub, among his backers. He had accused ministers of "astonishing incompetence" over the handling of the sale and on Wednesday threatened to quit within 48 hours.

He said: "The government has blundered from one disaster to another over the dome. I am giving the government 48 hours, then I am out of here. I have kept quiet for two months but I can't stand it any longer. We are frustrated about the way it's going on, and it is now time to reopen the bid process and give the Dome a real chance. It could be a top international entertainment venue, and, during the day, a world-class visitor attraction."

Achieving a dome deal ahead of the general election now looks unlikely and the Lib Dems' dome spokesman, Norman Baker, said it would become an "albatross around the government's neck" during the campaign.

William Hague on Thursday attacked the government's handling of the dome bidding process.