The National Institute for Health and Clinical Excellence (Nice) said the price being charged by pharmaceutical firm Bayer for the medicine was "simply too high". Treatment with the drug costs £36,000 a year per patient.
But cancer charities said it was a "scandal" that patients are being refused the only drug that has been shown to extend their lives.
Nexavar (also called sorafenib) is not a cure but has the potential to help people live longer, typically by six months.
Bayer, which offered a patient access scheme where the company would provide every fourth packet for free, said it will appeal the decision.
The drug is suitable for advanced hepatocellular carcinoma (HCC), which occurs when the cancer tumour originates in the liver rather than spreading there from elsewhere in the body.
The only hope of a cure is surgery but very few patients are eligible for this.
More than 3,000 people in the UK are diagnosed with liver cancer every year and more than 3,200 die from the disease.
In 2006, 3,190 people were diagnosed with liver cancer in the UK.
In 2007, 3,202 died of the disease, according to the most recent figures available from Cancer Research UK.
Only around 20 per cent of patients are alive one year after diagnosis, dropping to 5 per cent after five years.
Andrew Dillon, chief executive of Nice, said: "We were disappointed not to have been able to recommend the use of sorafenib but after carefully considering all the evidence, including the proposed patient access scheme in which the manufacturer offered to provide every fourth pack free, sorafenib does not provide enough benefit to patients to justify its high cost.
"We have recently changed our approach to appraising high cost treatments which can extend life for terminally ill patients.
"This has meant that more of them are now being recommended. We looked at sorafenib in just the same way but the price being asked by Bayer is simply too high to justify using NHS money which could be spent on better value cancer treatments."
Mike Hobday, head of campaigns at Macmillan Cancer Support, said: "We are extremely disappointed that Nice has decided not to recommend sorafenib as a treatment for people with advanced liver cancer.
"It is a scandal that the only licensed drug proven to significantly prolong the lives of people with this devastating disease has been rejected, leaving them with no treatment options.
"It's time to rethink the way new cancer drugs are assessed to ensure fairer access to drugs for people with rarer cancers."
Bayer said Nice did not appear to have acted in accordance with its own processes.
Nicole Farmer, business unit head of Bayer Schering Pharma oncology in the UK, said: "While we recognise that Nice has difficult decisions to make, we are without doubt that today's guidance goes completely against UK HCC treatment guidelines, Nice's own 'end of life' criteria and the current government strategy to bring cancer outcomes in line with Europe.
"Bayer has proposed an excellent patient access scheme for Nexavar, unique to the UK, to enable patients in this country to benefit from this life-extending medicine.
"We believed we had satisfied Nice's criteria for how Nexavar would be assessed - however, the 'goal posts' appeared to have moved.
"We shall appeal against the decision and, if we are successful, this will enable the NHS to offer a similar level of access to Nexavar as other EU countries such as France, Germany, Spain, Italy and Romania where it has already been granted funding."
Kate Spall fought for the drug for her mother Pamela Northcott, who died in 2007.
Her local health trust in Wales denied the drug but Mrs Spall won two months of treatment for her mother.
Mrs Spall said Nice's end of life policy and recommendations contained in a 2007 review by cancer tsar Professor Mike Richards had been ignored.
"Yet again we are subjected to more spin and no substance," she said.
"When are the government going to wake up and realise we want clinicians to decide on our treatments - not accountants and statisticians?
"Today, I put my heart and soul into ensuring that no cancer patient ever goes through the hell that she suffered and I have won cases for over 250 UK patients, with two new patients' requests each day.
"So despite this devastating news, in my mother's name I will continue to fight for UK cancer patients and win so they don't have to spend the last few months of their lives fighting for themselves, often by themselves".
Professor Peter Johnson, Cancer Research UK's chief clinician, said: "The results of a large international trial found that sorafenib (Nexavar) helps patients with liver cancer to live longer.
"This drug has an effect in people with advanced liver cancer who are unable to have surgery or any other treatments, so we are disappointed that the manufacturers have been unable to reach an agreement to enable Nice to recommend this drug.
"It is particularly frustrating that cancer patients in the UK are unable to access this drug when it is routinely available elsewhere in the world."
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