The Department of Communications has written to Eir, confirming its proposal would not meet the key objectives of the National Broadband Plan.
The company had suggested it could roll it out for less than €1bn at an Oireachtas committee hearing last month.
Communications Minister Richard Bruton has told the Cabinet he expects a contract to be signed later this year with the preferred bidder.
The department has concluded the Eir plan is not feasible, and has written to the company to confirm the Government's position that a State subsidy cannot be given to the firm to complete the programme.
In May, the Government officially gave the go-ahead for the plan to roll out high-speed broadband to every home, farm and business in the country.
It will see €3bn of State subvention for a private company to roll out broadband n rural areas.
The consortium led by Granahan McCourt - the sole remaining bidder in the tender process - was named as the preferred bidder.
The first new homes will be connected in 2020 - but thousands of others may have to wait years to be on the grid.