Mr Justice Holland ruled at the High Court in Manchester that the management of the home had taken all practical steps in view of 60-year-old Sylvia Sparrow's aversion to cigarette smoke.
Mrs Sparrow claimed she was forced to leave her job because her asthma was triggered by being forced to work in a "smokers' corner", where elderly residents smoked almost constantly.
The judge said the only issue he had to decide was whether the owners of the home were in breach of their duty in failing to do all that was reasonably practical to reduce Mrs Sparrow's exposure to passive smoking after she was diagnosed as having asthma in February 1990.
The judge said: "Weighing all the factors, I have to find the plaintiff has failed to prove the defendants were negligent so as to cause injury to her. I cannot uphold that the system of work was negligent."
Mrs Sparrow, whose action was funded by the Royal College of Nursing, was also ordered to pay the costs of defending her action and to hand over pounds 5,000 that had been lodged with the court in advance.
The judge said the home's duty of care embraced the patients as well as the staff and it could be that if the interests of the patients justified Mrs Sparrow being moved into the smokers' area there might have been no other practical course open to them.
The judge said common sense and legal authorities suggested that an employer's needs to take account of their workers' susceptibilities "had to be kept within bounds".
He said: "That is as much a problem for employees as employers."
Mrs Sparrow said she was disappointed by the ruling, but added: "I do feel I have achieved something. There are people out there suffering and they need to stand up and be counted. This is not going to go away."
In a statement, solicitors for St Andrew's Homes Ltd, which ran the nursing home where Mrs Sparrow worked, said: "This judgment shows that there is no automatic right to compensation for employees working in a smoky atmosphere, particularly where an employee can exercise a choice about where he or she works, as in Mrs Sparrow's case."