Kentucky has withdrawn its offer of tax breaks for a religious-themed park that would feature a 500ft-long wooden ark because its organisers plan to screen park employees based on religion.

The planned Ark Encounter park has evolved from a tourism attraction into an outreach for the Christian ministry that is building it, the state tourism secretary, Bob Stewart, said in a letter to the group’s lawyer on Wednesday.

“Certainly, Ark Encounter has every right to change the nature of the project from a tourism attraction to a ministry,” Stewart wrote in the letter. “However, state tourism tax incentives cannot be used to fund religious indoctrination or otherwise be used to advance religion.”

The long-planned attraction is being built by a nonprofit subsidiary of Answers in Genesis, the Kentucky-based Christian ministry that operates the popular and controversial Creation Museum. Foundation work and earth-moving are under way at the site in Grant County near Williamstown.

Mark Looy, vice-president for outreach at Answers in Genesis, said in an email on Wednesday evening that the group is exploring its legal options.

The project had received preliminary approval in July for up to $18m in tax rebates.

Governor Steve Beshear, who had supported the project since it was unveiled in 2010, said in a written statement on Wednesday that the leaders of the project had gone back on a pledge not to discriminate in hiring.

Beshear said “it has become apparent that they do intend to use religious beliefs as a litmus test for hiring decisions”.

According to Stewart’s letter, Answers in Genesis said in a meeting with tourism officials last month and in correspondence this week from their Covington lawyer Jim Parsons that the ministry intends to screen employees based on their religion.

Parsons wrote that the Answers in Genesis subsidiary Crosswater Canyon, which will operate the Ark Encounter, has the legal right to “include religion as a criteria [sic] in its future hiring decisions”.

Answers in Genesis says the attraction would be modelled on the massive ark described in the Old Testament story of Noah, which tells of a worldwide flood and the ship that survived. State officials originally hailed it as a boon for tourism like the nearby Creation Museum, which has attracted more than a million visitors to its Bible-themed exhibits since it opened in 2007.

But it drew some critics, including science educator Bill Nye and the group Americans United for the Separation of Church and State, who argued that it should be ineligible for tax incentives. Nye, known for his Science Guy television programme, was critical of the ark project during a widely publicised debate with the Answers in Genesis founder, Ken Ham, in February at the Creation Museum.

The rebates could have given Crosswater Canyon up to 25% of the $73m expected cost of the project. The owners would have received that money over 10 years only after the ark was built and open to the public.

Beshear said in the statement that the project can still move forward and be a “successful attraction, drawing visitors and creating jobs, much like the Creation Museum”.