Welsh authorities took questionable risks in offering grants worth £247m linked to a £1bn mothballed silicon chip plant in Newport.

The criticism is made in a report published today by the auditor general of Wales into a project that in effect spelt the end of big state aid packages for foreign investment in the UK.

"Some uncertainty is unavoidable when awarding public funds to attract inward investment," says Jeremy Colman in the report. "But the provision of state aid should be closely monitored at all times, and recovery plans and legal agreements tightened to safeguard significant loss to taxpayers if projects fail."

Mr Colman says the European Union approved part of the huge package of subsidies "based upon cost estimates that cannot be fully substantiated".

The plant was the centrepiece of a project led by LG Electronics of South Korea, which was expected to create 6,000 jobs. After microprocessor prices plunged, it never went into production.

The auditor's comments highlight control weaknesses among Welsh public bodies eager to support prominent projects in one of the poorest parts of the UK. However, Mr Colman's criticisms are milder than those in a report on the £43m National Botanic Garden for Wales. He said grant-giving to the millennium project had lacked "common commercial disciplines" and breached Treasury guidelines.

Mr Colman commends Welsh authorities involved in the Newport investment for "obtaining a good settlement in difficult circumstances" by clawing back £71m of £131m paid out to LG and other businesses.

Wales has struggled to replace declining manufacturing employment with new private sector jobs. Regeneration in South Wales has been largely driven by public sector spending, at a level exceeding local tax receipts. Cardiff's Chamber of Commerce has warned of an "unsustainable imbalance" between the public and private sectors. Ironically, local politicians have earmarked one abandoned LG Phillips site in Newport as a "Welsh Whitehall", to accommodate public servants relocated from London and the south-east.

Wales has been adept at luring businesses to locate there with grants, the size of which have reflected generous EU support for poor regions.