He was commissioned by Archbishop Mario Conti to create a centrepiece for the newly-renovated St Andrew's Cathedral, in Glasgow, when it reopens next year.
But Howson, 51, one of Scotland's most successful artists, has pulled out of the agreement to paint the martyrdom of St John Ogilvie - after discovering he was not getting a penny for the 18-month project.
The church had called the proposed work the "most important commission for a Scottish Catholic Cathedral since the Reformation".
The 24ft-by-18ft canvas, with 600 individual figures, would have been the largest crowd scene ever painted in Scotland.
Announcing the commission, Archbishop Conti said: "I've always felt we should have a memorial to this saint, whose canonisation many of us remember with great pride.
"The opportunity has arisen to have a truly world-class painting done by Peter Howson - a painter I've long admired, both for his artistic talent and his spirituality."
But Howson has told friends he is pulling out after discovering details of the deal struck between the church and his former manager, William O'Neil, who is at the centre of a police probe after officers seized Howson paintings from his home.
Yesterday, Howson said: "I am ill at the moment. I can barely do a drawing, let alone any type of painting."
And friends said there is no way he will now start work on the cathedral painting.
One said: "Peter would have worked for 18 months and not received a penny. To make matters worse, the painting would have been owned by O'Neil's company and loaned or leased to the church.
"It would have been Peter's largest-ever work and worth about £500,000. Peter has been screwed. He doesn't want to offend the Church but there is no way he can go ahead."
Last month, the Sunday Mail revealed that Howson had met officers from the Scottish Crime and Drug Enforcement Agency.
The elite crimebusters swooped on the £1.5million mansion O'Neil shares with his ex-model partner, Denise McNeil, in Bardowie, north of Glasgow.
They seized a £1million haul of Howson paintings owned by convicted heroin dealer O'Neil, 43. He and McNeil, 39, have been charged under proceeds of crime laws.
Pals of Howson say O'Neil exploited the artist, who was signed to his management firm - Art & Soul (Glasgow) Ltd.
A Church spokesman said: "We have not received any notification suggesting the commission will not be completed. We're aware of Peter Howson's health problems and our first concern would be for his health.
"St Andrew's is not due to re-open for a year. Our hope would be that during that time his health will improve allowing the commission to be carried out."
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