The government's National Programme for IT initiative to computerise all patient records nationally suffered another blow as the £896 million NHS contract with Fujitsu was terminated earlier today.

Connecting for Health's talks with Fujitsu to revise contract terms in favour of greater flexibility failed. Fujitsu had held out for more money or a return to the original terms.

Fujitsu clinched the 10-year deal for installing the programme in the south of England in 2004, but renegotiation talks began in July 2007. Severance of the deal could cost the Japanese electronics company some £300 million.

The overall NHS project has been dogged by controversy, delays, overspending and security fears, along with criticism that it is fundamentally misconceived. The programme was one of the foundation stones of former prime minister Tony Blair's quest for modernity in government. In practice, this and other public-sector programmes have demonstrated that government and large-scale technology project management are rarely natural bedfellows.

A spokeswoman for NHS Connecting for Health said: "Regrettably and despite best efforts by all parties, it has not been possible to reach an agreement on the core Fujitsu contract that is acceptable to all parties. The NHS will therefore end the contract early by issuing a termination notice.”

Fujitsu is the second IT firm to leave the project. In 2006 Accenture – which was responsible for the north and north east England components of the project – walked away from parts of the programme.