The Rev Ashley Cheesman, 46, broke down as he was told by three members of the Privy Council in Downing Street that they were upholding the Bishop of Leicester's decision to more than halve his 800-member parish in Gaulby.
The Manufacturing Science and Finance Union (MSF), which had supported Mr Cheesman, condemned the decision as an abuse of power by the Church of England that would enable it to remove any vicar without consulting either clergy or parishioners.
The judgment follows an acrimonious dispute between Mr Cheesman, a father of two, and his former bishop, the Right Rev Thomas Butler, who was recently made Bishop of Southwark. The pair clashed over deteriorating relations between Mr Cheesman and a number of his parishioners.
Mr Cheesman had said he was being ousted because of his unorthodox evangelical preaching. His new parish of just 300 people would dramatically cut his income by reducing his earnings from funerals, christenings and weddings, he had said.
MSF general secretary Roger Lyons said: "The church abandoned attempts to reach a settlement with Mr Cheesman and used an administrative measure to effectively starve him out. His new parish will not provide sufficient income for a man with a wife and two children.
"This ruling means that the feudal system imposed on clergy has been formally upheld and they have no protection from unfair treatment by their employer. Every Church of England vicar should now be looking over his shoulder in the light of what has happened today."
Mr Lyons said Mr Cheesman was now "inconsolable".
The nine-month legal battle began after the Diocese of Leicester invoked the Church of England 1983 Pastoral Measures to reduce Mr Cheesman's seven-church rural parish.
The vicar, with the backing of the MSF's 1,500-member clergy section, appealed to the Privy Council, the highest court for ecclesiastical disputes.
In a split ruling by the Privy Council's three-member panel - consisting of Lord Lloyd of Berwick, Lord Hobhouse of Woodborough and Sir Christopher Slade - it was decided that the church authorities had acted responsibly.
The chairman, Lord Lloyd, found in favour of Mr Cheesman but the other two found that the clergyman had no case under church rules.
Union officials argued that the judgment contradicted the Government's Employment Relations Bill currently going through Parliament, which contains a clause which gives clergy full employment rights.
Under current church rules, bishops have been able to argue that clergy are employed by God and are paid a stipend to allow them to carry out their pastoral work.
Mr Cheesman, who effectively holds a lifelong legal freehold to his parish although the church can now dictate its size, receives a stipend of pounds 15,000 with extra income coming from fees for special occasion services.
His dispute with a group of parishioners started in 1994 when they objected to his evangelical preaching style and began to hold prayer and hymn sessions in the churches without him. To try to halt the impromptu ceremonies, the vicar resorted to locking up the organ in one church.
Acrimony increased when Mr Cheesman invoked ancient church protocol allowing him to appoint church wardens. He made his mother church warden at one of his churches - even though she lived 100 miles away in Suffolk.
An earlier attempt to remove the vicar by Bishop Butler, who has been replaced as Bishop of Leicester by the Right Rev Timothy Stevens, using the 1977 Incumbent (Vacation of Benefices) Measure, ended because the church could not afford the pounds 250,000 legal bill.
The Diocese of Leicester yesterday said it now hoped Mr Cheesman and his discontent former parishioners would be able to live side by side.
In a statement it said: "We believe this scheme will result in better arrangements for the cure of souls in the parishes involved. The strongly held and differing views of local church people have now been fully aired and considered through every process available. We hope that all parties concerned will work towards making a success of the new arrangements."
The diocese said the new parish had been created to allow Mr Cheesman to continue his ministry.
Mr Cheesman was unavailable for comment yesterday.Reuse content