Channel 4 rejected a last-minute rescue deal with Germany's Senator Film and UK tax financiers Matrix that was geared at allowing the broadcaster to slash its investment to $15m (£10m) but still save FilmFour as a going concern with an annual war-chest of $45m (£30m).

This decision to reject the partnership has fuelled criticism that the channel never gave the ambitious stand-alone film operation a fair chance. Newly-installed chief executive Mark Thompson axed the vertically-integrated division this week, removing arguably the UK's most significant film financier, and replacing it with an in-house development and production unit.

The proposed deal with Senator and Matrix was engineered by FilmFour management after talks broke down between UK tax financier Ingenious, which Channel 4 had enlisted to look for partners, and Stewart Till's Signpost films and National Lottery franchise DNA Films. The arrangement called for Senator to take over all international sales and German rights in return for covering around 50% of budgets. Senator, which confirmed it had been involved in discussions about FilmFour's future, already had a partnership with FilmFour whereby it provided around 25% of budgets for German rights and an equity position.

Under the proposal, Channel 4 would have provided only $15m (£10m) - the same as its new in-house department will have - and Matrix was to arrange financing for a third-party EIS tax scheme that would invest in selected FilmFour projects. Under the plan, FilmFour would have slashed its annual overheads of $9m (£6m), effectively wiping away most of last year's loss of $8.1m (£5.4m).

One source suggested that Channel 4 rejected the plan as it had lost faith in the film division's management, but this week's upheaval shows that the broadcaster was not interested in just changing key staff. Channel 4, which may well go ahead with a tax-financing partnership anyway for its in-house division, argues that it was always going to be out of its depth making larger scale productions.

The biggest blow for FilmFour appears to have been Death To Smoochy, a $55m Warner Bros production which flopped in the US and is yet to be released in the UK. The film operation is expected to lose its entire investment of more than $5m.

Meanwhile, FilmFour's presence in the notoriously punishing UK distribution sector was heavily criticised in some quarters, particularly as the operation raised p&a budgets on more ambitious films. Charlotte Gray eventually turned a profit and FilmFour's average overall box-office is understood to be 87% up on the old regime. But Sexy Beast's failure to hit home even though it was a success in the US was embarrassing, while critics had a field day as Lucky Break's disastrous UK campaign cost around $3m (£2m) in p&a.

"Over the last four years significant investment and hard work has gone into FilmFour Ltd to develop it as a meaningful player internationally," said Rob Woodward, managing director of FilmFour parent 4Ventures. "However, this has not proved possible given the sheer scale of the major studios."

But FilmFour supporters say that blaming studio competition is an excuse. Charlotte Gray, FilmFour's biggest in-house production, disappointed theatrically but is still in profit. Lucky Break and Crush, also amongst FilmFour's most criticised titles even though they are also in profit, are in the low-budget range of $6.2m (£4m) and $7m (£4.5m) respectively.

"Blaming the studios is such a lame excuse," said producer Andrew Eaton, who had Stephen Fry's Bright Young Things set up with FilmFour. "Independent film making is a battle...but if you've got Bend It Like Beckham, exhibitors are falling over themselves."

Channel 4's declaration this week that it wanted to focus on "British performance and production talent " did find support in the industry. Director Ken Loach told reporters that he hoped the channel would now look more to Europe, while one executive said that low budget filmmaking was being overlooked in the UK in general as companies rushed to find large-scale scripts that are not there.

But FilmFour supporters say it had been making critically acclaimed low-budget UK films such as Sexy Beast, Late Night Shopping and The Warrior and that this week's move limits rather than changes its remit. Upcoming projects involved leading new local directors such as Lynne Ramsay, Jonathan Glazer and Damien O'Donnell. Ironically, rival BBC Films is increasingly looking to make large-scale international films such as Bruce Willis comedy Me Again.

"I still believe we had the right model," said Webster. "We were not trying to compete with the studios. We made one movie over $15.5m (£10m) [Charlotte Gray] and invested in Death To Smoochy."

Webster, who will step down, said that he regretted investing in Death To Smoochy, a black comedy directed by Danny DeVito and starring DeVito, Robin Williams and Edward Norton. FilmFour apparently strayed from the sales-led formula of its in-house productions, which inevitably sacrificed upside to minimise its downside, to become an investor on a studio production.

Webster blames "a collision of catastrophic elements", including a wordwide recession, a decline in the TV business and international pre-sales and "a long run without box-office hits, although we had sales hits". He also cited a change of management as Thompson came in to replace Michael Jackson, who launched FilmFour and appointed Webster. Many see Jackson's departure as the killer blow, leaving FilmFour at the mercy of TV executives traditionally sceptical about the film business.

"The film and TV business are very different," Webster said. "TV has such a short turnaround and film has a long gestation in terms of both production and recoupment."

Many in the industry believe that, just as Philips sold PolyGram just before it produced hits such as Notting Hill, Bridget Jones's Diary and Billy Elliot, FilmFour needed more time. "It just proves that there are two factors that shape the industry time and time again," said one executive. "Firstly, so much is based on personalities, on the attitudes of one person. Second, when you start something, and you hit some trouble, you have got to have the guts to finish it."