Giant Bomb currently has an article describing the complete chaos surrounding the cancellation of this fan developed project. The main issue it seems that Capcom had was that not enough fans were providing feedback in these dev-room sessions. Capcom said in a statement:
"From the outset the MML3 Project was intended to give gamers across the world insight and input into the development process. Part of this process includes an assessment of whether the title will go into full production, and is based on a number of criteria with input from different sectors of the company. Unfortunately it was not felt that the Mega Man Legends 3 Project met the required criteria, and it is with regret that we must announce that the Mega Man Legends 3 Project has been cancelled, meaning that Capcom will not be releasing the Prototype or the full game."
This was then followed by some very strange behavior from Capcom Europe's twitter page, saying:
"It's a shame the fans didn't want to get more involved :-( if we saw there was an audience for MML3 people might change minds."
Which caused many fans to be quite angry at the suggestion that they were not dedicated enough.
This whole thing seems like one huge cockup on Capcom's part. It's ok to cancel a game, publishers do it all the time, but the way in which this one was handled just seems awful. It's pretty much a punch in the gut to any fans out there that were really interested and getting involved in the process. I don't think we'll see any re starting of this project, but i do hope that Capcom has learned it's lesson.