Santander has cited too much focus on established companies as the reason it has pulled out of the Business Growth Fund.
The bank was one of the founding partners in the £2.5 billion ($4.1 billion) scheme, which aims to invest up to £10 million in emerging businesses with sales of between £10 million and £100 million.
However, a disagreement over investment strategy and the fund's focus has led to the lender quitting the initiative, the Daily Telegraph reports.
The institution also rejected the plan for equity investments - rather than mezzanine debt offers - to be made.
A spokesman from the financier said: "Santander believes it will be able to make better use of its resources by focusing on its own regional funds."
The bank recently claimed that its solid first-quarter performance in 2011 means it is now a serious challenger to the dominance of the largest lenders in the UK.
By Tony Aynsley