Chinese police shut down the country's first gay pageant tonight, just one hour before the event was due to begin.

Participants hoped the contest would help challenge domestic stereotypes about homosexuality, classified as a mental illness until 2001, and show the rest of the world that gay people could be accepted in China. But officers arrived at a Beijing nightclub shortly before the Mr Gay China competition started and told organisers it was not properly licensed. They are understood to have told the venue's owners that it was "a sensitive issue".

The event was to feature a swimwear round and talent section, but contestants would also have been judged on their ability to represent the gay community. The winner was to take part in the Mr Gay Worldwide final in Norway next month.

"I'm about to cry," said Xue Fei, one of the eight contestants. "We really wanted to promote the sunny side of gay people."

He said he believed the pageant had already achieved some of its aims because advance coverage had highlighted gay issues.

But he added: "It's been a long time since China's reform and opening policies began and I think it really should follow the steps of the international world.

"In China, the population of gay people is large, but many of them cannot live in the sunshine. I really hope we can live with our heads held high and face the world happily."

Another participant, Simon Wang, said he was "disappointed, but not surprised". He added: "I think maybe the reason it was cancelled was because they had too much publicity."

The police officers who came to the venue were friendly and asked questions about homosexuality, said Ryan Dutcher, one of the organisers.

He added: "I'm very disappointed because we worked hard for this event, but I don't see it as a major step back.

"Anyone who's been in China has seen how much the gay community has grown and how people – even the authorities – have become more accepting."

The organisers had hoped the contest would be acceptable to officials because of other recent events. Last year, activists in Beijing held a gay film festival for the first time; previous attempts in 2001 and 2005 were shut down. Shanghai saw the first gay pride festival on the mainland, although some events were cancelled, despite attempts to keep it low-key.

"I think this is a very stupid decision because showing the beauty of gay people to the world is a very positive thing," said Wan Yanhai, a well-known gay rights activist, who arrived at the venue after hearing of the cancellation.

"It would have fostered a good international image of China and benefited not only gay people here, but also China as a whole, because it would have shown the image of a harmonious society with gay people living happily in China."

Gay sex was decriminalised in 1997, but Sara Davis, executive director of the US-based Asia Catalyst, which supports grassroots activists, said the authorities' attitudes towards gay events were still very mixed. "There are progressive elements which show recognising people as gay is not a threat to the government's stability, but also very conservative elements who are threatened by this activity."