BP and federal authorities said they are now turning to a new strategy to stop the leak after admitting their "top kill" operation had failed, but it will take at least four to seven days before it can be put into place.
At least 20 million gallons are now estimated to have gushed into the ocean since the disaster unfolded five weeks ago, threatening an environmental and economic catastrophe across hundreds of kilometers of the US Gulf Coast.
"After three full days of attempting 'top kill,' we have been unable to overcome the flow from the well, so we now believe it's time to move on to the next of our options," BP Chief Operations Officer Doug Suttles told a press briefing.
President Barack Obama called the developments "enraging" and "heartbreaking".
Speaking on NBC's Meet The Press, Carol Browner, the White House's energy adviser, said: "More oil is leaking in the Gulf of Mexico than at any other time in our history. It means there is more oil than the Exxon Valdez (in Alaska in 1989)."
Engineers had spent days pumping some 30,000 barrels of heavy drilling fluid into the leaking well head on the ocean floor in a high-pressure bid to smother the gushing crude and ultimately seal the well with cement.
The announcement marks the latest failure for BP, which despite a series of high-tech operations over the past month has appeared powerless to bring the disaster to heel since an explosion on the BP-leased Deepwater Horizon oil rig April 20 which killed 11 workers. The rig sank two days later.
The British energy giant had stressed that "top kill" was the best chance at stopping the leak other than drilling an entirely new relief well, a process that has already begun but is expected to take another two months.
"Obviously, we're very disappointed in today's announcement and I know all of you are anxious to see this well secured," US Coast Guard Rear Admiral Mary Landry told the briefing.
Efforts will now focus on severing the damaged riser pipes that lay crumpled on the ocean floor, then installing a containment device that could capture the leaking oil and syphon it to the surface.
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The new containment plan, scheduled to begin next week, is called the "Lower Marine Riser Package Cap (LMRP Cap)."
It is a complex operation that will be carried out by remotely operated robots on the ocean floor, BP officials said - nearly one mile (1.6 kilometers) below the spot where the drilling rig exploded.
The robots, wielding cutting tools, will sever the bent riser pipe and replace it with the LMRP cap, BP officials say.
The cap will then be connected to a riser leading to the drill ship Enterprise, nearly above the robots.
The setback came after Mr Obama visited the region for the second time since the spill began 40 days ago, in an attempt to bring new urgency to the response.
"It is as enraging as it is heartbreaking, and we will not relent until this leak is contained, until the waters and shores are cleaned up, and until the people unjustly victimized by this manmade disaster are made whole," Mr Obama said.
He ordered Interior Secretary Ken Salazar and other top environmental officials to return to the region next week to continue their work aggressively responding to the spill.
Government data released Thursday suggested between 18.6 million gallons and 29.5 million gallons of oil have poured into the Gulf - far more than the roughly 11 million gallons of crude spilled in the 1989 Exxon Valdez disaster. It has already been labelled the worst US environmental disaster in history.
Amid the environmental catastrophe, there were also growing fears for the health of cleanup workers exposed to the oil and chemical dispersants.
Four more crewmen aboard ships helping burn off surface oil were evacuated to hospital late Friday after falling ill, a day after the Coast Guard announced that seven workers were evacuated for medical emergencies.