The Neighbourhood system was set up by the previous Liberal Democrat council and created a second tier of local government in the shape of seven areas. It was much criticised by residents because it only allowed them to move house within their own Neighbourhood.
A borough spokeswoman said people at one end of a street were prevented from moving to the other end if it meant crossing into another Neighbourhood.
'It was so restrictive - that's why people hated it,' she said.
'An elderly resident living at one end of Salmon Lane in Poplar requiring the support of a relative that lives at the other end of Salmon Lane in Stepney would be unable to move under the old system.'
She said housing need and the time that residents have spent on the waiting list will determine who gets housed first rather than where they live. 'This will tear down the artificial boundaries, speeding up transfers and creating more choice.'
The scheme led to many complaints being successfully lodged with the local government obmudsman.
The seven Neighbourhoods also had the power to opt out of borough-wide schemes.
The recent emergence of the British National Party in Tower Hamlets and the eight-month tenure of a council seat by Derek Beackon, their representative, highlighted the controversy surrounding the system.
'The Neighbourhoods were the power bases. The worst scenario would have been if the BNP had got two or three seats on the Isle of Dogs they could have gained overall control of that Neighbourhood and a budget of pounds 24m,' she said.
However, Phil Maxwell, chairman of the housing committee, said the abolition of the scheme was not a result of the BNP's short-lived success. 'The BNP are not in the equation really. This policy to abolish the Neighbourhoods was on our manifesto before that,' he said.
He said in place of the system will be a one-tier structure.
'This will be a return to the traditional style of local government. The Neighourhood system made for duplication of resources, confusion among residents and a lack of co-ordination. This is a return to common sense.'
The first meeting under the new system will be a Policy and Resources one due to take place tomorrow .
London Underground recalled all 50 new trains on the Central Line, after a fault with the brakes was found. LU continued using the trains, but denied putting passengers at risk.
The trains were back in service yesterday. The fault was discovered when a driver overshot Leyton station after applying too much pressure to the control lever. This opened the supply of compressed air and released the brakes.
A spokesman said: 'At no time were passengers at risk. If too much pressure is applied then the driver can re-engage the brakes in a split second.'
More rush hour trains were promised by LU yesterday. The changes mean more District Line trains to Wimbledon from Edgware Road, and more Piccadilly and Circle Line trains. Six extra trains an hour will run to and from Uxbridge on the Metropolitan Line, off peak. The new timetable starts on 29 May.