According to Eurogamer’s inside sources, the title development was halted as of Wednesday. The source now says that the two teams will be focusing on the Fable franchise. The tech behind Milo will go towards a Kinect title in the Fable series.
When Microsoft was questioned about the Milo’s cancellation, they answered, “Microsoft does not comment on rumour or speculation.” The standard reply, that often means that at least something is going on. For now, we will have to wait and see if Milo appears again in the future.