Tessa Jowell, the secretary of state for culture, media and sport, announced the decision this week in a meeting at the Commons.
She said the review would look at the problems behind the decision to abort the Picketts Lock stadium in north-east London, which was to have hosted the World Athletics Championships in 2005.
Stadium trouble-shooter Patrick Carter claimed in his report that it was too expensive.
The planned national stadium is also under a cloud after attempts to raise funds to build it were unsuccessful.
She made the right decision based on the evidence of an external report
Gerald Kaufman MP
Jowell told the culture, media and sport select committee:
"Before projects are signed off at the planning stage, we need to ensure their desirability and affordability."
Jowell defended the government's decision to drop the project and said if the stadium had gone ahead it would have appeared that the government had "wilfully proceeded to host a substandard event".
"It was the right and only decision to make," she said. "Picketts Lock would have proceeded only on the basis it was going to work. There would have been no extra public money to bail it out."
