KUWAIT (Reuters) - Kuwait decided on Sunday to scrap a deal to form a $17.4 billion petrochemical joint venture with U.S. company Dow Chemical DOW.N.

Kuwait's Oil Minister Mohammad al-Olaim (C), talks to the media about the status of the joint venture project between Kuwait Petroleum Company's subsidiary, Petroleum Industries Company (PIC) and US-based Dow Chemical for a petrochemical joint venture called KDOW, in Kuwait City on December 22,2008. REUTERS/Stephanie McGehee

The cancellation of the deal, which had met opposition in Kuwait's parliament, was acknowledged Sunday by Dow and is a blow to the largest U.S. chemicals company. Dow had planned to use the proceeds to repay a large part of $13 billion in debt it will have to shoulder once its acquisition of rival Rohm & Haas ROH.N closes, which is expected to be in early 2009.

The Supreme Petroleum Council, at a meeting headed by Prime Minister Sheikh Nasser al-Mohammad al-Sabah, “arrived at the decision to cancel the contract,” state news agency KUNA said.

State-run Petrochemical Industries Co (PIC) signed a deal earlier this month with Dow to launch the joint venture, K-Dow Petrochemicals, and was due to pay $7.5 billion. The deal was part of Dow’s strategy to reduce its exposure to the cyclical nature of the commodity chemicals business.

Dow did not return calls seeking clarification about whether the deal’s collapse would affect its plans to acquire Rohm & Haas.

The deal would have been the latest between a major U.S. company and Middle East investors. General Electric GE.N and Abu Dhabi investment agency Mubadala Development Co formed an $8 billion joint venture in July to provide commercial finance in the Middle East and Africa.

The deal had angered some Kuwaiti parliamentarians who said the project was not economically viable in light of the global financial crisis and slumping petrochemical sales.

A cabinet statement said the global crisis had prompted the cabinet to ask the council “to take the necessary measures to cancel the contract ... within a sound legal framework while safeguarding the state’s rights and interests,” KUNA reported.

Four liberal MPs had threatened to question the prime minister, a senior member of the ruling family, unless the deal was scrapped.

Another move by some deputies to question Sheikh Nasser on another issue had prompted the cabinet to resign in November, though the ruler reappointed his nephew.

Parliament has a history of challenging the government with the same liberal MPs having opposed building the $15 billion Al-Zour refinery for which final contracts have not yet been signed despite an award in May.

Dow said in a statement Sunday, it was “extremely disappointed with the decision by the Kuwait Government, and is in the process of evaluating its options pursuant to the Joint Venture Formation Agreement.” The Midland, Michigan-based company added that it “remains committed to its Middle East Strategy.”

Dow and other chemical makers around the globe face one of the worst slumps ever in chemical demand, due to recessions in most developed countries and a sharp slowdown in emerging economies.

Earlier this month, Dow said it would close 20 facilities, divest several businesses and cut 5,000 jobs, or 11 percent, of its workforce. It also plans to temporarily idle about 180 plants.

Kuwait and Dow lowered the value of the joint venture more than 8 percent to $17.4 billion earlier this month after the Gulf Arab state asked to cut its contribution in light of a sharp slowdown in global demand.

The new company had been due to market petrochemicals and plastics such as polyethylene, polypropylene and polycarbonate, used in products ranging from plastic bottles and compact disks to computers and agricultural compounds. In July, Dow said it would acquire Rohm & Haas for $15.3 billion in a move to broaden its specialty product offerings.