Nintendo has cancelled production on a sequel to 2002's psychological horror Eternal Darkness, a fresh report has claimed.

According to a post on NeoGAF, a sequel to Eternal Darkness was in development for Wii U at Canadian development studio Silicon Knights, but cancelled owing to last week's failed lawsuit against Unreal Engine 3 licensor Epic Games.

"When Nintendo saw that they would need to pay an additional 10 million USD to have the company survive that develops [Eternal Darkness 2], they didn't seem to like it, especially as they wouldn't get anything in return," read the post.

"So it looks like there have been internal discussions between Nintendo and Silicon Knights. NCL reviewed its decision and it appears as if Eternal Darkness 2 is cancelled for now."

Silicon Knights was forced to hand over $4.45m in damages to Epic Games last week following the licensor's claims that "Silicon Knights breached [its] license agreement" during the development of Too Human, "misappropriated Epic's trade secrets, and infringed Epic's copyrights in the Unreal Engine 3 code."

This, coupled with the "commercial and critical failure" of Too Human and "miserable reviews" of X-Men Destiny, reportedly led to the studio's headcount being reduced from 150 to just 40.

And now, the post alleges, most of those have been laid off too, "leaving the studio in limbo".

As a result, plans for Eternal Darkness 2 were scrapped, the post claims.

Eternal Darkness 2 has never been officially confirmed to be in development.

Neither Silicon Knights or Nintendo have yet to provide comment on the matter.