Algirdas Krivickas, director of the trolley bus company in Kaunas, said employees had reacted strongly to the adverts which read: "A gay can serve in the police" and "A lesbian can work at school."
Drivers had refused to take out trolley buses bearing the adverts. These had now been taken down.
"Some said they feared the trolley bus could be vandalized, some said they do not want friends to laugh at them," Krivickas said.
Conservative attitudes are common in the former eastern bloc. A gay rights parade held in the Latvian capital Riga sparks controversy every year.
Vladimir Simonko, president of the Lithuanian Gay League, which ordered the adverts, said the aim was to encourage discussion.
"It is a sad situation. Such attitudes force homosexual people to emigrate from Lithuania," he said.
Two-thirds of the funds to promote tolerance toward homosexuals came from the European Union and the rest from the Lithuanian government.
Lithuania will later this year become home to the European Institute for Gender Equality.
In Brussels, a European Commission spokeswoman said the EU executive "regrets very much that this project cannot be followed through..."
"Diversity is a key value in the European Union, but in order to make it reality the change has to start in our minds," said Katharina von Schnurbein.