The major freight rail line was intended to connect Melbourne and Brisbane, but it will be cut short in the central NSW town of Parkes after its cost nearly tripled in six years.
Independent analysis showed the price tag for the project had blown out from $16.4 billion in 2020 to more than $45 billion, Transport Minister Catherine King said on Wednesday.
"We are taking sensible decisions to realign the future of Inland Rail and build a safe, efficient and reliable network for the future," she said.
The 1600km freight line, made up of new and existing track, was designed to run from Beveridge, just outside Melbourne, to Kagaru near Brisbane, making it easier to move goods across the east coast and reduce reliance on trucks.
Under the revised plan, the government will hold on to land for the rail corridor north of Parkes – about halfway between Melbourne and Brisbane – but it has no immediate plans to build the second half of the project.
Queensland Farmers' Federation chief executive Jo Sheppard said the move was disappointing for regional Australia, where people were already struggling with rising fuel and freight costs.
"Inland Rail was set to be a nation‑building project that would deliver tangible benefits across the country, including increased investment in regional Queensland," she told AAP.
"Leaving this project unfinished will be worn as a long‑term cost for our country, and particularly our regions.
"This is a missed opportunity to increase productivity, reduce emissions and transform the way in which we move freight in Australia. We've been left with a train to nowhere."
Some communities along the line had raised concerns about noise and towns being effectively cut in two by the route.
Instead of completing the rail route, the federal government will pour an extra $1.75 billion into the east coast freight network in Tuesday's budget to upgrade tracks, improve signalling and extend passing loops.
In Queensland, where 345km of proposed track will miss out on federal funding, Deputy Premier Jarrod Bleijie said the move was "beyond disappointing" and a "real kick in the guts" for the state.
"This Inland Rail would have taken hundreds of thousands of trucks off the road and backed our agriculture and horticultural sector," he said.
He accused the Albanese government of "another attack on Queensland commuters and community" and branded the move "short‑sighted" and "really, really disappointing".
Former federal Nationals leader David Littleproud said the decision was "devastating but not surprising" for regional Queensland, blaming the "fundamentally flawed" choice of a floodplain route more than a decade ago.
NSW Farmers president Xavier Martin said farmers and towns along the northern part of the Inland Rail corridor deserved answers after land had been acquired and sections of track built.
"Certainty matters and if the funding is stopping at Parkes then the government must be up-front about what happens next, because real people and real businesses have already paid a price," he said.
Queensland's Western Downs mayor Andrew Smith said the decision was hugely disappointing and a missed opportunity for regional growth.
Inland Rail could have taken heavy trucks off country roads that are already worn out and underfunded, he said.
"It's not going to hurt us today, but down the track, in the long term, it's devastating," Mr Smith said.
The cutback came as regional Queensland was growing strongly in productivity and needed major nation‑building projects to keep up, he said.
"Every region in rural Queensland, if not rural Australia, is having issues around road infrastructure that's under‑maintained, under‑managed and underfunded," Mr Smith said.
