The consented project, from the first round of UK offshore development, would have been sited in the Bristol Channel off south Wales.
The developers say that difficult seabed conditions, poor wind speeds and restrictions on turbine heights make the project unviable. Dave Rogers, regional director of renewables for E.ON, said the decision has not been taken lightly.
"A lot of work has gone into trying to make the project work but, sadly, we've had to recognise that we can't go ahead. Put simply it has become clear that Scarweather Sands is not the best place to build a small scale offshore wind farm," Rodgers said.
But the company has learnt a lot from the project which has helped it successfully deliver other larger projects, he added. Dong and E.ON are also partners, with Masdar, in the 1GW London Array offshore project.