Mr O'Farrell and the Victorian Premier, Ted Baillieu, told Ms Gillard they were ready to immediately sign a deal to reduce ''green tape'' at a meeting on Thursday also attended by senior business leaders.

But, as revealed by Fairfax Media, Ms Gillard had already decided to shelve the green tape deals because the negotiations were resulting in wildly varying arrangements between states and some state approval processes were inadequate.

''It's clear the Prime Minister caved in. She blinked to pressure from the green groups who wrongly characterised this as a watering down of environmental standards,'' Mr O'Farrell said, referring to a campaign by environmentalists and scientists against the proposed handover.

''This has wasted hours and hours of the time of federal and state bureaucrats to get to the point where we were ready to sign a deal.''

Business leaders, who heralded Ms Gillard's green tape promise as ''historic'' when it was made at their first formal advisory meeting with the Prime Minister and premiers in April, were also angry.

''We thought this was a brave move … The decision to ditch it came out of the blue,'' said Business Council of Australia president Tony Shepherd. ''You'd hope it wasn't because of the influence of the environmental campaigners, because the accusations they were making … were manifestly incorrect.''

Despite the premiers' anger, the meeting made it clear the Prime Minister's proposed energy regulation reforms were likely to win support from the states at the Council of Australian Governments meeting on Friday.