The BBC’s governing body today rejected the corporation’s controversial proposals for a £68 million online local video service, claiming it would threaten the existence of "valued" local newspapers already struggling to survive amid falling sales.

Sir Michael Lyons, the BBC Trust chairman, said that plans for an enhanced network of 65 websites across the UK would be a poor use of the licence fee.

The decision comes after many regional and local newspapers criticised the plans, saying they would represent unfair public-funded competition. Facing collapsing year-on-year sales, many have already merged with rivals, extensively culled staff and some are considering closure.

“It is clear from the evidence that, although licence fee payers want better regional and local services from the BBC, this proposal is unlikely to achieve what they want," Sir Michael said.

“We also recognise the negative impact that the local video proposition could have on commercial media services which are valued by the public and are already under pressure.

“We believe the BBC’s priority should be improving the quality of existing services.

“The public wants better quality regional television news programmes and more programmes of all kinds produced in and reflecting their areas.

“We would expect BBC management to consider carefully the conclusions of this public value test before returning to us with new proposals.”

Despite the opposition of local newspaper owners to the scheme, however, the National Union of Journalists (NUJ) - the profession's union - claimed that the decision to scrap it was a "missed opportunity" to improve local news for communities across the UK.

Jeremy Dear, the General Secretary, said that local papers were unable to provide an effective regional news service because of job cuts, and that competition was needed to give the public better information.

“Local papers are closing and job cuts mean thousands of journalists don’t have the time to do their jobs properly anymore. ITV is withdrawing from its regional and local news commitments," Mr Dear said.

“Against a significant decline in local journalism, here was an opportunity to take a small step in the opposite direction by actually enhancing local news provision.

“The BBC made commitments to invest in local and regional news services. We expect the corporation to stick to its promises and ensure that other news services now benefit from this investment.

“Newspaper employers have spent years taking huge profits out of local media whilst cutting jobs. Now they have helped stop new jobs being created because they said such competition would stifle their investment.”

The controversial nature of the licence-funded BBC local scheme came further under the spotlight last night as the Daily Mail and General Trust (DMGT) announced that advertising at its local papers was down over the past two months and that it was cutting jobs at its national and regional titles.

The plan was also understood to have left Andy Burnham, the Government's Culture Secretary, concerned. Ministers are worried that the scheme could leave the BBC using public money to threaten the existences of local newspapers.

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