Widespread abuse has scuppered a pilot scheme that allowed hospitality bosses to hire up to 9,000 low-skilled workers from outside the EU each year.
The Home Office launched the Sector-Based Schemes (SBSs) in May 2003 to help the hospitality and food-processing sectors plug their labour gaps.
But it found the hospitality scheme was being misused to gain illegal entry to the UK. Foreign agencies were applying for fictitious jobs without the knowledge of the named companies, while workers who filled legitimate jobs were failing to leave after 12 months.
Many applicants were turned away because they had fraudulent documents, were underage, or could not satisfy officials that they would leave after a year.
While the food-processing SBS will run for another year, the hospitality pilot will not be renewed, although new permits will be issued until 31 July or until the full quota is reached.
The Home Office believes hospitality can turn instead to workers from the Eastern European accession states. They filled 42,070 vacancies between May 2004 and March 2005 compared with 8,665 SBS-permit holders.
Martin Couchman, deputy chief executive at the British Hospitality Association, said it was "extremely unfortunate" that abuse had "torpedoed" the scheme. He feared it would put hospitality in a difficult position regarding any future pilot schemes.
"This adds 9,000 to our labour problem over the coming year, "he said. "I don't see East Europeans as a permanent work force."
Couchman predicted that the other original EU member states would soon be competing with the UK for the same pool of cheap labour and employers may resort to illegal agencies if they couldn't find enough staff.