Bob Coomber, chief executive of Southwark council, said the DETR's decision was "disappointing and unhelpful" and added that he would try to persuade the DETR to reconsider.
Meanwhile, Southwark councillors voted last week to pledge an initial £1.5m to underwrite its revenue spending on the project. Coomber said these funds would come from "reserves and balances" in the council's budget for this year and next year. "It will not come out of any service committee budgets," he added.
The money will enable the council to recruit legal, financial and planning consultants.
These will be hired in July to advise the council on its development agreement with the Southwark Land Regeneration consortium, which is due to be signed by September 2002.
Nicholas Taylor, director of Southwark Land Regeneration, said the council's decision to underwrite its revenue spending should clear the way for a co-operation agreement with Southwark this week.
Coomber declined to say where the council would get the £13.5m it needed to fund its role on the project over the remaining nine years.
We will ask what information the DETR needs to make it look more positively on our bid
Bob Coomber, chief executive, Southwark council
He said: "We are entering into a process to see if we can get a development agreement.
"Once we agree on a development the council wants, we will take a series of further decisions to see how we might make it happen."
He said the council could cover the cost by using its own funds or by borrowing money on the strength of the project itself, taking into account the benefits that would flow to the borough from the development.
Coomber said he hoped to persuade the DETR to bend the rules on capitalisation.
"We will ask them what kind of information and procedures they might need to make them look more positively on our bid for the release of funds.