CMN, a French-based company planning to take over Swan Hunter if the order was placed, was due this morning to have talks with the shipbuilder's receivers, Price Waterhouse.
Fred Henderson, chairman of CMN support services, said: 'We have not finally said 'no' to the purchase. But I would not like to give anyone the impression of optimism. This is a great disappointment to us.'
Without the pounds 40m contract to refit the auxiliary ship Sir Bedivere, there is just four months' work left at Swan Hunter. Defence ministers said Swan Hunter's tender came fourth, and was pounds 10m higher than the winning bid by Babcock Rosyth Defence.
Swan Hunter has built 2,700 ships since 1862, but went into receivership in May last year when it lost an order to build a helicopter landing ship.
The MoD announced that Swan Hunter might get a smaller refit order for a tanker, the RFA Olwen, but refused to place a firm contract until it was satisfied with the financial viability of the yard. Mr Henderson said: 'The price we would be prepared to offer with just the Olwen contract is probably much less than the receiver is prepared to accept. It is very unlikely that we would be able to reach agreement. The receivers may decide they can get more for the business by closing the yard and selling the assets.'
Ed James, one of the joint receivers, said: 'Without the Sir Bedivere - while I have only had the briefest of discussions with CMN since the news was made public - it does seem it would be unlikely they would be prepared to proceed.
'Regrettably, if we are unable to reach any agreement with CMN very quickly, in all probability there will have to be very significant redundancies.'
The immediate effect of the decision is that 100 technical and design staff who have been working on the Sir Bedivere project are likely to be made redundant. They share the same fate as 238 men laid off a few months ago.
Jonathan Aitken, Minister for Defence Procurement, said last night on BBC radio that the decision could not be affected by sentiment. 'I am very sorry for the effects these competitions may have on the future of Swan Hunter and its workforce.
'This was an entirely fair competition. Swan Hunter lost it. My heart goes out to Swan Hunter but, as a minister, I had no other course than to award the contract to the clear winners, Rosyth dockyard.'
The award of the Sir Bedivere contract to Rosyth came as a boost for the Scottish yard and will ease the pain in Fife caused by the announcement last week by the MoD that the adjoining Royal Navy base at Rosyth was in effect to be closed as an operational base.
Allan Smith, chairman of Babcock Rosyth Defence, the yard's private sector manager, said: 'This is an excellent contract for us to have won against intense competition.' The contract includes an option on two sister vessels, the Sir Geraint and the Sir Percivale, which could bring the total potential value to more than pounds 100m, the dockyard said.
Devonport Management Limited, which also bid for Sir Bedivere, won an order to refit HMS Birmingham. A month ago, the Devonport yard sacked 850 people and warned that more would be made redundant unless it won more orders.