St Andrews University was planning to spend £46 million on the project, which would have seen a complete refurbishment of its central library, creating more space for collections and student study areas.
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However, Louise Richardson, the university principal, said the plan had been conceived before the global economic downturn and did not take enough account of the need to invest in collections.
Therefore, she said, only £14m would be spent on an interim improvement programme.
An official added that the university was not in financial difficulty and was heading for a £5m surplus this year.
Ms Richardson said: “Over the last 18 months, the landscape of higher education in the UK has changed markedly. From a position of relative buoyancy and growth, universities are now struggling to
manage deep cuts in funding and the certainty of more to follow.
“Many are making staff redundant or closing departments. In St Andrews, these are scenarios which we are determined to avoid if at all possible.”
She said that in light of the fiscal and planning uncertainty the institution faced, St Andrews could not commit to spending £46m.