The future of the £80 million redevelopment of Hinckley town centre is hanging in the balance after Sainsbury's announced it was pulling out of the project.
Rescue talks have been arranged after Justin King, the group chief executive, wrote to the council saying that because of delays and other problems the bus station scheme no longer made financial sense.
But the Liberal Democrat-controlled Hinckley and Bosworth Borough Council, which is supporting the scheme, said: "The deal is not dead."
The project, known as The Crescent, included shops and a cinema, with Sainsbury's being its anchor.
Start dates for the project, which was hoped to create hundreds of jobs, have come and gone without work beginning.
Mr King wrote to council chief executive Steve Atkinson on April 29 saying the company was pulling out.
He was responding to a letter from Mr Atkinson on April 16 seeking clarification of the company's position. Mr King wrote: "I can confirm that we have today notified the developers, Tin Hat Regeneration Partnership LLP, that we will not be proceeding with our store within the proposed town centre regeneration scheme."
He said the conditions of the initial contract with Tin Hat had not been met.
He said: "A major part of the attraction of this project for us was the wider development, including the other shops and the cinema, with the physical improvement to the fabric of the town centre.
"However, we understand that a lack of demand from other shop tenants, the prohibitive cost of building the cinema and the incentive packages needed to entice other potential occupiers, coupled with the stringent conditions laid down by Tin Hats' external funders, means the developer can no longer build out the scheme as originally designed.
"This raises the prospect of our supermarket trading in isolation for an undefined period and, consequently, this significantly diminishes the trading and commercial back drop for us. We share your disappointment that the changes I have noted mean that Sainsbury's is no longer able to be part of this scheme."
Mr Atkinson said talks had been arranged and insisted the scheme was not dead.
He said: "We received notification of Sainsbury's intentions and responded immediately, requesting further discussions between the parties. The parties have agreed to take part in further discussions and these will be taking place as soon as possible.
"The council is doing its utmost to ensure that the development does take place. As it stands, the deal is not dead."
A Sainsbury's spokesman said: "Discussions regarding progress of the Hinckley town centre regeneration scheme are on-going between all parties. Updates will be provided to the community once discussions have progressed and the next steps are confirmed."
Peter Batty, Conservative group leader on the council, said: "I am very angry that the public has been kept in the dark over these major developments. It is clear the council knew there was a problem over the involvement of Sainsbury's well before the county council elections on May 2.
"The public deserves more openness. We do not want sweeteners, we cannot afford, to be offered to keep Sainsbury's on board."
