The organisation has received £16.9m from the Scottish Government since it began in 2004, but will now no longer receive funding after it finishes its current commitments in April 2008.
The move goes against the Russell Commission's 2005 report, A National Framework for Youth Action and Engagement, which aimed to boost youth volunteering across the UK.
Project Scotland offers young people aged 16 to 25 full-time, subsidised volunteering placements for up to one year, in not-for-profit organisations. It has helped 1,900 young people to get involved in volunteering.
Kate Mavor, chief executive of Project Scotland, said: "The Scottish Government's decision to stop funding is extremely disappointing, as Project Scotland has shown itself to be popular and effective."
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