The Austrian government says it cannot afford to buy back five masterpieces by Gustav Klimt after a court ruled they should be returned to the California-based heir of a Jewish family which fled Austria during the Nazi period.
Wolfgang Schüssel, the Austrian Chancellor, said yesterday that further negotiations with lawyers acting for Maria Altmann were pointless because the government was not in a position to put up the $300m (£170m) the works are estimated to be worth.
The future of the paintings has been the subject of intense speculation since an arbitration court ruled last month that Austria was obliged to return them to Mrs Altmann under legislation on the restitution of works of art seized during Nazi rule.
The court's decision brought to an end a long-running ownership wrangle between Vienna and Mrs Altmann. Austria accepted the ruling, but had hoped to retain the paintings, which are considered national treasures, by offering tax incentives to potential sponsors.
Elisabeth Gehrer, the minister responsible for cultural affairs, said the government's decision not to pursue attempts to acquire the works meant they could be handed over to Mrs Altmann with immediate effect.
All five paintings are currently on display in Vienna's Belvedere Palace, where visitor numbers have soared following the ruling that they be handed back.
They include the widely replicated Adele Bloch-Bauer I, also known as the Golden Adele, which bears similarities to Klimt's best-known work, The Kiss.
The director of the museum at Belvedere, Gerbert Frodl, said he was deeply saddened that the government would not be purchasing the paintings. Mr Frodl said the decision represented an "immense loss" for the gallery and for Austrian cultural life.
Mrs Gehrer, of the People's Party, has come under fire from the opposition over the lengthy legal battle for the paintings.
The Social Democrats said it was a "huge disgrace" that agreement had not been reached earlier with Mrs Altmann.
The Greens described the handling of the affair as "dishonourable".
The decision not to purchase the paintings was welcomed by the junior party in the Vienna coalition, the Alliance for the Future of Austria, led by the right-wing populist Jörg Haider.
A party spokesman said the Austrian people would not have understood such a decision to pay the "exorbitantly high" price for the works.
It is still feasible that the paintings will remain in Austria. The American lawyer for Mrs Altmann, E Randol Schoenberg, said yesterday that he had already been approached by a number of prospective buyers in Austria.
Mr Schoenberg said it was possible that other interested parties would contact him. He said Mrs Altmann and the other surviving heirs would now consider "all other possibilities" for the paintings' future.
Maria Altmann, 89, who ran a clothing boutique in Beverly Hills before retiring, is the niece of Adele Bloch-Bauer.
After Mrs Bloch-Bauer died in 1925, the paintings remained in her husband's possession, but were left behind when he fled the country after the Nazis came to power.