A £50m Met police deal with the controversial US tech company Palantir has been blocked by the London mayor, Sadiq Khan, with City Hall citing a “clear and serious breach” of procurement rules.

Scotland Yard had been in talks, revealed by the Guardian last month, to use Palantir’s AI technology to automate intelligence analysis in criminal investigations. But Khan intervened on Thursday to stop the flagship contract, which would have been Palantir’s largest yet in British policing.

The Mayor’s Office for Policing and Crime (Mopac), which must approve contracts of this size, withheld approval, saying Scotland Yard had seriously engaged with only one potential supplier, Palantir. Khan’s office also said the Met risked becoming locked into Palantir’s technology and that the proposed deal had not “ensured or demonstrated value for money”.

His spokesperson said Londoners only wanted to see public money being paid to companies that “share the values of our city”.

There does not appear to be any block on Palantir bidding for a similar future contract and Mopac said it wanted to work with the Met on a “new procurement at pace”.

There is rising public and political concern about Palantir’s widening reach in UK public services, where it has more than £600m in contracts with the NHS, the Ministry of Defence, the Financial Conduct Authority and several smaller police forces. The US company was co-founded by the Trump-supporting tech billionaire Peter Thiel and also serves the Israeli military and Trump’s ICE immigration crackdown operations.

It worked with Peter Mandelson’s lobbying company, Global Counsel, until its collapse, and Mandelson took the prime minister, Keir Starmer, on a trip to Palantir’s Washington DC showroom. Last month its chief executive, Alex Karp, published a mini-manifesto extolling the benefits of US power and implying some cultures were inferior to others, in what one MP called “the ramblings of a supervillain”.

A company’s ethics cannot be taken into account during public procurement processes but the mayor’s spokesperson said in a statement that Khan would raise the question of whether this should be changed with the government.

City Hall’s reasons for blocking the two-year contract to use Palantir’s AI to automate intelligence analysis included Scotland Yard’s failure to obtain Mopac’s approval for its procurement strategy, which meant it was not possible to determine if the market had been tested to ensure value for money.

In a letter to the Met commissioner, Mark Rowley, Khan’s deputy mayor for policing and crime, Kaya Comer-Schwartz, said “I have not been provided with any acceptable explanation for this failure, which I regard as a clear and serious breach of the applicable procedural requirements.” She said the process had created “legal and reputation risks” to Scotland Yard and the mayor. She also highlighted how the Met had originally costed the contract at £15m-£25m a year and that the proposed deal was at the top of that range.

A recent Met Police trial of Palantir’s AI to monitor staff behaviour in an attempt to root out corrupt and failing officers, was carried out under a contract that was awarded directly, without advertisement or open competition, Mopac found. The value of the contract was marginally below the threshold required for City Hall’s approval.

Scotland Yard last month heralded the success of the trial, saying it resulted in hundreds of officers being investigated for misdemeanours, including making money by abusing the computerised roster system, falsely claiming they were in the office, and failing to declare they were Freemasons.

Hundreds of thousands of people have signed petitions calling on ministers to break contracts with Palantir, including its £330m deal to help operate a patient and medical data platform for NHS England. MPs have attacked the deal as “dreadful” and “shameful”, and the government has admitted it is “no fan” of the US company’s politics.

Palantir’s UK chief executive, Louis Mosley, has been seeking to rebut criticism of the company, in what has become a highly public PR fight. He claims its NHS system has helped deliver 110,000 additional operations and a significant fall in discharge delays.

Other police forces using Palantir AI to assist investigations have described it as transformative, allowing them to rapidly process mountains of evidence on mobile phones, including translations from foreign languages. Bedfordshire police credited the system with helping bring down an organised crime gang that looted £800,000 from cash machines.

Khan’s move will be a blow to the Labour government’s efforts to use AI to improve policing. In January, the home secretary, Shabana Mahmood, called for police to “ramp up use of AI” and to adopt the technology “at pace and scale”. A strategy for the future of policing includes creating a national centre, described by some as “Police.AI”, and a £115m investment to “create a platform for identifying, testing and then scaling AI technology”.

Scotland Yard and Palantir were approached for comment.