The projects deemed too expensive were the Latrobe Valley recycling scheme, where recycled water from the Eastern Treatment Plant in Carrum would have been pumped to Gippsland's power stations, and the Yarra River option, which entailed substituting river flows with recycled water.

The estimated cost of the two shelved projects was $3.8billion and $2.1billion respectively.

Instead, the Government will focus on a number of smaller projects including upgrading the plant at Carrum to produce class A water as part of its water plan Our Water, Our Future.

From 2012, only class A water will be discharged at the Gunnamatta outfall on the Bass Strait side of the southern peninsula.

A further 1.6billion litres of that water and 1.6billion litres from the Boneo treatment plant will be used for market gardens and public open spaces.

Other projects to reduce outflows at Gunnamatta and save valuable drinking water include a Mornington recycling project that will provide 300,000 litres to irrigate the Mornington racecourse and public open spaces, and the Frankston community recycling scheme, which will provide 700,000 litres for public open spaces.

Last week, peninsula residents started drawing their water from the Tarago reservoir after Water Minister Tim Holding opened a purification plant at Drouin West.

The peninsula has received its water from the Cardinia reservoir since 1994 when Tarago became too polluted.

Mr Holding said these and other

projects would potentially use up to seven billion litres of class A recycled water from Carrum.

He said the Government had ruled out using recycled water for drinking, but Melbourne already used more recycled water than any other capital city.

"It is disappointing these large projects have proved too expensive, but there are limits on how much water bills should increase to pay for water projects," Mr Holding said.