Controversial plans to develop a bauxite mine on sacred tribal land in India have been scuppered as India's environment ministry has rejected a proposal by Vedanta Resources to mine the aluminium ore in the eastern state of Orissa.

Members of the Dongria Kondh tribe gather on top of the sacred Niyamgiri Hills. Plans by Vedanta to mine bauxite from the area have now been rejected by India's environment ministry. (Photograph: Reinhard Krause/Reuters) Campaigners, who have been backed in their fight against the mining giant's plans by Joanna Lumley and Michael Palin, described the move as a "stunning victory". Monty Python star turned professional traveller Palin expressed "absolute delight" in the news adding: "I hope it will send a signal to the big corporations that they can never assume that might is right. It's a big victory for the little people."

The project had been thrown into doubt last week when a government inquiry said that mining would destroy the way of life of the area's "endangered" and "primitive" people, the Kutia and Dongria Kondh tribes. The four-person committee also accused a local subsidiary of Vedanta of violating forest conservation and environment protection regulations.

Jairam Ramesh, the minister for environment and forests, said today that the government will issue what is termed a show-cause notice and take action against Vedanta. The news sent shares in the company down almost 6% in early trading, making it the biggest loser in the FTSE 100 index and wiping almost £300m off the value of the business.

"There are very serious violations of environment act and forest right act," Ramesh told Bloomberg. "There is no emotion, no politics, no prejudice in the decision. It is purely based on a legal approach."

Campaigners, whose supporters also include the activist Bianca Jagger, have fought long and hard to prevent the mining of bauxite in the Niyamgiri Hills. Vedanta, which can appeal against the decision, had wanted to expand its existing refinery in the area, generating a sixfold increase in capacity, and had gained approval from the local state government.

Amnesty International published a report last year claiming that a Vedanta refinery in the same area had polluted local rivers, damaged crops and disrupted the lives of the local tribe.

The project has been delayed by four years because of intense opposition from environmental and tribal rights group. At Vedanta's annual meeting in London last month its board of directors faced criticism from shareholders, celebrity activists and charities all protesting about the company's human rights and environmental record.

Meredith Alexander, head of trade and corporates at ActionAid, said: "Today the Kondh people are celebrating a massive victory in the campaign to safeguard their very existence.

"The mine would destroy the mountain they worship as a god and end their way of life forever. Vedanta could appeal this decision, but the Kondh are asking the company to respect the government's decision and their clearly expressed opposition to the mine."

Survival International, whose supporters sent more than 10,000 protest letters to the Indian government, described the decision as a "stunning victory" and "a crushing defeat for billionaire Anil Agarwal, Vedanta's majority owner and founder".

Survival campaigner Dr Jo Woodman said: "This is a victory nobody would have believed possible. The Dongria's campaign became a litmus test of whether a small, marginalised tribe could stand up to a massive multinational company with an army of lobbyists and PR firms and the ear of government.

"Incredibly, the Dongria's courage and tenacity, allied with the support of many people in India, and Survival's supporters around the world, have triumphed."

Survival's director, Stephen Corry, added: "The era when mining companies could get away with destroying those in their path with impunity is thankfully drawing to a close.

"The concerned public must remain vigilant about these so-called development projects - companies simply cannot be trusted voluntarily to abide by human rights standards, particularly when dealing with tribal peoples who can't know what they're up against."