The Government has withdrawn 500,000 funding from the controversial Junction project in Oxford but councillors claim the scheme will still be operating by the end of the year.

The South East England Development Agency (SEEDA) said yesterday it was pulling the plug on the project, aimed at rehousing and retraining homeless young people, which has been beset by problems since its launch two years ago.

The announcement follows news that the Liberal Democrats had rejected the plan, put forward by the city's former Labour administration, to provide the bedsit-style accommodation in Abbey Place.

The Lib Dems are looking at a range of sites across the city centre or possibly rejecting the scheme, at a cost of 279,721. Housing committee chairman David Connett said the Junction project would go on and that the loss of Government funding could even be a blessing in disguise. He added: "Seeda has withdrawn its funding for this year and future years, but this has been on the cards for a while. We will not site the project in Abbey Place, but devolve it into accommodation around the city centre and units that can provide central support and educational opportunities.

"The project we want to take forward should be approved in September and will be up and running by November.

"There is still more than 2m in the pot, including 700,000 of Housing Corporation money. We still have more than enough resources."

But Labour councillor Carole Roberts said: "The Liberal Democrat and Green administration have lost the city 500,000 of money that should have gone to help young homeless people. "The need for this project will not go away because Liberal Democrats and Greens choose to ignore people who need our help."