The Stanley Park project was first in line to receive £9 million in European Union funding, but following a Programme Monitoring Committee meeting, those holding the purse strings believe the scheme is so risky they have stripped the club of preferred-bidder status.
The club must now fight it out with dozens of other Merseyside regeneration schemes for the money.
The problem lay in Liverpool FC being unable to give the committee 'cast-iron' assurances that it had the private financial backing, despite having 18 months to secure a deal.
Councillor Flo Clucas, chair of the meeting said: 'We are determined that this £9 million will not be lost to Merseyside.
'There are a number of schemes which could benefit from it - but we have not ruled out Liverpool FC.
'The club has had 18 months to bring forward their proposals and they are now competing with other projects, which have been appraised. Put simply, it's time for the club to put up or shut up.'
The news will come as a blow to AFL, but it will hardly be unexpected. The scheme has been dogged with setbacks and funding problems from the very start, with Liverpool FC chasing every possible avenue to secure funding for the stadium.