The castle community, the third-smallest district council with a budget of pounds 3.5m, faces bankruptcy if it has to pay the claimed figure.
Yesterday Sue Bolam, chairman of the policy committee, placed the blame firmly with the Government. "The council will be pressing the Secretary of State for financial assistance towards meeting the claim."
She said the council would seek a meeting with officials at the Department of the Environment, Transport and the Regions, insisting their "inaction" had in effect been "tacit acceptance" of the original outline planning permission.
A council spokeswoman said the authority could not afford the retail giant's "colossal" claim, adding: "When the planning application was first submitted it went to the government office for the North-east. At that time they had the opportunity to call it in... The guidelines on out- of-town stores were in the process of changing in 1993 and there were no clear guidelines at the time of granting planning permission."
The town, used as a backdrop to the film Elizabeth, granted outline planning permission for development, including retail use, to the Duke of Northumberland's estates in 1993.
However, the town's 9,000 population then learnt that the Duke had sold the 12-acre site to Safeway, which had a smaller store in the centre. In 1996, fears that Safeway would close its central shop led to John Gummer, then Environment Secretary, stepping in. At the time, Alnwick was offered the opportunity to revoke the permission. A public inquiry later concurred with Mr Gummer that the permission was "grossly wrong". In March last year Mr Prescott modified the planning permission to disallow any retail development.
Last month Mr Justice Richards dismissed the council's High Court attempt to challenge the modification order. Yesterday Alnwick announced it would not be appealing against the High Court ruling.
Instead its officials, with Zurich Municipal, which has insured the council for pounds 1m, would be sitting down with Safeway to try to work out a "respectable settlement".
Should that fail the matter would go the Lands Tribunal to assess the amount to be paid to Safeway. "It is such an unusual case we suspect it will be difficult to agree a settlement and it will go all the way to the Lands Tribunal," the council said.
The DETR said it was unable to comment, but indicated that some details related by the council were disputed.Reuse content