A steering group set up by the Association of Petrochemicals Producers in Europe has shelved the plan after failing to receive unanimous support from its 31 members.
The move is a serious setback for the industry, which has been hit by billions of pounds of losses over the past five years due to chronic overcapacity and recession.
In Britain it also throws the future of BP's chemical complex at Baglan Bay, South Wales, which employs about 600, into doubt.
Petrochemicals is one of Europe's most important industries, providing direct employment to 600,000, with another 3 million jobs indirectly dependent on it.
However, little progress has been made to scale back overcapacity, partly because of political factors. Many European producers are state-controlled and have been reluctant to close plant because of the impact on jobs.
The plan's objective was to reduce Europe's capacity by 1.5 million from a total 19.4 million tonnes it is expected to reach next year.
However, it required full support to work. Last month it was voted down by Imperial Chemicals Industries, Repsol, the Spanish group and Norsk Hydro, its Norwegian counterpart.
As a result Appe set up a steering group to resolve the differences, which ended in deadlock.
The trade body plans to explore other proposals, but both BP Chemicals and ICI said producers would now individually have to consider shutting surplus plant.
City analysts warned that the plan's failure would delay the long-hoped-for recovery in the industry by a year and could hit share prices.Reuse content