Lend Lease has won the battle to regenerate London's rundown Elephant & Castle in one of the largest regeneration schemes in Europe.

The Australian property developer, which was recently selected to build the Olympic village for the 2012 Games – will carry out the £1.5bn project in a joint venture with residential developers Oakmayne Properties and First Base

Southwark Council formally announced the decision at a meeting at its offices this morning.

The news is a huge blow to the other short-listed party Midlands-based developer St Modwen and joint venture partner Salhia Real Estate of Kuwait. St Modwen owns the much-maligned pink shopping centre at the Elephant which is due to be demolished. If St Modwen refuses to come to an agreement to sell the centre the council may have to use its powers of compulsory purchase if necessary.

The 170 acre scheme will comprise a new retail complex, 6,000 new homes and flats and will create an estimated 4,000 new jobs. It will be completed in 2014 and hopes to end years of decline in the area which has made Elephant one of the most rundown and congested areas in London. Retail tenants such as Marks & Spencer, John Lewis and Debenhams have expressed interest in the scheme which will be pedestrianised to reduce traffic and pollution in the area.

As part of the redevelopment the 1960s Heygate Estate will also be demolished. Half of the new homes will be social housing while the rest will be sold on the open market. Increased security measures will also be used to control the high levels of crime in the area.

Elephant project director Chris Horn said the new homes will be built 'without preconceptions of how social housing should look'.

St Modwen had been regarded as favourite for the deal because it already owns the ugly pink shopping centre at the heart of the site. But Lend Lease has a bigger balance sheet and has made a commitment to the area with a number of schemes in partnership with Oakmayne, another developer.

The regeneration team at Southwark has made its view known to councillors and a final decision will be taken on Tuesday. The recommendation has been kept under wraps.

Southwark council refused to comment and sources cautioned it was impossible to guarantee which party would win until this week.

The council was meant to choose its preferred developer in February. Concerns over the handling of the process forced previous contenders -among them a consortium that included New York real-estate billionaire Richard Lefrak -to drop out, leaving only St Modwen and Lend Lease in the fray.