The store chief was being considered for the post of chairman of the Audit Commission, which oversees public spending in local government and the NHS, until a public row over the taxation of share options compelled the Treasury to change course.
Ministers have now ruled that his appointment to the pounds 18,025-a-year part- time chairmanship would be "inappropriate".
Sir Richard, 59, is unlikely to miss the money - as chairman of Marks and Spencer he is paid pounds 807,000 - but the private snub will bring to a rapid end his short-lived venture into public service.
The Government now has to cast around for someone to replace Sir David Cooksey, a Bank of England director and chief executive of Advent Ltd., who is moving on to head the Local Government Commission later this month. "We shall just have to start the search all over again," said a ministerial insider.
In the meantime, Clive Thompson, Sir David's deputy and vice-president of Arco Chemicals, will take over as interim chairman.
The Audit Commission has a staff of 1,283 and an annual budget of pounds 82.6m. It acts both as a watchdog and a consultancy to the health service and local government, pointing out where they waste money and telling them how not to do it again.
Sir Richard, who says he is "basically a low-profile and very shy man" had already indicated his disillusion with public service after the fiasco of his CBI-sponsored investigation into "greed in the boardroom".
He told MPs: "I have had enough", after a week of controversy over his committee's recommendation that share options should be taxed as income rather than capital gains.
To Sir Richard's dismay, the Chancellor immediately changed the tax regime on all such arrangements, provoking an outcry that he had brought thousands of workers and middle managers into the net as well as the "fat cats" targeted by the Greenbury Report.
In the face of hostility from industry and Tory backbenchers, Mr Clarke backed down and imposed the tax changes only on new share option schemes, prompting Labour charges that he had failed to address the multi-million profits being made by directors and top executives of the privatised utilities.
Andrew Smith MP, Opposition Treasury spokesman, said: ''If what we are hearing is correct, this is priceless. John Major, via the CBI, put in a man to do the job the Government itself could not or would not do - tackle the scandal of multi-million share options in the privatised utilities.
"Then the Government went much further than the Greenbury Committee recommended, and ended up with egg on its face. It seems harsh that they now want to take it out on Sir Richard, whose only crime has been to do their dirty work."Reuse content