During 1957, the fate of the SR.177 was to be subject to a massive re-thinking of air defence philosophy in Britain, being principally outlined in the 1957 Defence White Paper, which called for manned combat aircraft to be replaced by missiles. Very shortly afterwards, OR.337 was cancelled and the prospects of an order from the RAF had evaporated.[19] This was a serious blow, while it the Royal Navy and Germany remained potential customers for the SR.177, the confidence of both parties was shaken by the move.[20]
Work on the SR.177 continued for a little longer, however, in the anticipation of continued interest from Germany. In September 1957, Aubrey Jones, the Minister of Supply, was keen to support the programme and had agreed to continue funding development of five of the six prototypes.[20] However, according to Wood, the SR.177 was subject to political in-fighting between Aubrey Jones and Duncan Sandys, the minister who had been the prime advocate of the Defence White Paper. While Jones assured German officials that the SR.177 project was continuing, Sandys contacted them to inform them that the aircraft was effectively dead.[20] These mixed messages led to considerable confusion and apprehension within the German Defence Ministry. Further difficulty was added when, in response to lobbying by Rolls-Royce Limited, the German government insisted that the Rolls-Royce RB.153 engine be used in place of the Gyron Junior, causing Saunders-Roe to work on a further hasty redesign of SR.177.[20][21] The Minister had visited the German government in November 1957 as the Germans wanted the arrangements to be between governments instead of between their government and Saunders-Roe.[22]
Of the remaining aircraft under consideration, the West German Government chose to purchase a development of the American Lockheed F-104 Starfighter interceptor instead to meet the role of "high-altitude reconnaissance machine, a tactical fighter-bomber, and an all-weather fighter",[22] along with the majority of European governments. This Lockheed coup, known as the "Deal of the Century", caused major political controversy in Europe and the West German Minister of Defence Franz Josef Strauss was almost forced to resign over the issue. During later investigation into Lockheed's business practices, it was discovered that Lockheed had paid out millions of dollars in "sales incentives" in each of these countries in order to secure the deal. Prince Bernhard of the Netherlands confessed to taking more than one million dollars in bribes from Lockheed to buy the F-104.[23]
Following the withdrawal of German interest and there being no requirement for the SR.177 by the RAF, the existing Royal Navy requirement was considered not worthwhile to proceed with. Accordingly, the Ministry of Supply soon chose to cancel the project. On 24 December 1957, a letter from the Ministry was received by Saunders-Roe, announcing the decision to terminate.[24] Saunders-Roe announced that it expected to make 1,000 workers redundant[25] as a result of the termination. As the jigs and near-complete aircraft was disassembled during the New Year, it was decided that the aircraft assemblies themselves should be stored in the event of the project being revived.[24]
In 1958, the SR.177 received one last burst of interest when Japan, which was interested in developing a rocket-jet fighter itself, approached Britain with a request for quotations for the purchase of the two prototype SR.53s along with the completion of two SR.177s.[24] However, due to a lack of backing from the British government, this initiative did not come to anything; the Japanses ultimately turned to the F-104 as well. Woods summarises the cancellation of the SR.177 as: "...it could ultimately have been built in hundreds or thousands. Due to ridiculous defence policies and a complete lack of Whitehall inter-departmental collaboration in the technology field, one of the most promising projects in a decade was destroyed".[24]