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The Government has cut funding to a proposed £30million project in which Prince Charles was to help boost sport participation ahead of the 2012 Games.
The cash from the Department of Culture, Media and Sport was to have been used to encourage more than 10,000 youths to take up sport or volunteering over the next three years. Ministers earmarked funding two years ago for the "Active Generation" initiative to have been run by the Prince's Trust and the Duke of Edinburgh's Awards scheme.
But the withdrawal of funding has led to allegations that a sports legacy - one of the claimed benefits from the Olympics - will fail to materialise.
Lord Newby, a Liberal Democrat peer who is chairman of sport for the Prince's Trust, complained of lost Olympic opportunity for the trust's target group - young people not in employment, education or training, so-called "Neets". The peer told the Lords: "It is the Trust's view that (the London Games organising committee) and the DCMS have not managed to create a coherent campaign behind which the third sector could unite to deliver legacy ambitions."
He added: "This is something the trust is very concerned about. It seems there isn't any money for this."
The DCMS said that Active Generation had been merely a "proposal" discussed with the Prince's Trust. It said an "ambitious new campaign" to encourage grassroots sport was being drawn up to be launched next year.
Lord Newby also criticised a scheme intended to help charities like his and community sports and arts clubs by letting them use a version of the Olympic logo. Lord Newby said it has backfired because it bars recipients from raising private sponsorship which would undermine the exclusivity of existing Olympic sponsors.
