Little was known about the game, which was revealed at E3 last year with a short trailer showing a metallic ball floating through futuristic robotic settings.
"Microsoft Studios is no longer pursuing this title," a Microsoft representative told Joystiq in reference to Matter. "We have no further details to share at this time."
The game came about as a collaboration between Gore Verbinski and Blind Wink Games after the Pirates of the Caribbean director tried Kinect for the first time.
He got the idea for Matter as a game based around the idea that the player's physical motion would influence their emotion as they played.
Matter was originally slated to release on Xbox Live Arcade some time this year.