On their official Devroom blog, Capcom has regrettably announced the cancelation of Mega Man Legends 3 after being assessed by "different sectors of the company":
Unfortunately it was not felt that the Mega Man Legends 3 Project met the required criteria, and it is with regret that we must announce that the Mega Man Legends 3 Project has been cancelled, meaning that Capcom will not be releasing the Prototype or the full game.
We can only express our deepest apologies to all of you who have lent us your unending support…
There are no plans to restart the project, and Capcom claims that Inafune-san's departure had no bearing on this decision. In a nice gesture, anyone whose ideas that were to be accepted into the game will receive a gift.
With this being the second Mega Man title canceled this year (the other being Mega Man Universe), this does not bode well for the series, though Capcom will "continue to pursue opportunities to create new titles in the series".
[Source]
