Everton's plans for a new stadium at Kirkby have been rejected by Communities and Local Government Secretary John Denham.
The club and Tesco had hoped to build a new stadium and a shopping complex, in a move which would have seen Everton leave their long-time home, Goodison Park.
Everton chief executive Robert Elstone said the decision had left the club "bitterly disappointed" but stressed it did not mean the end of the search for a new home.
In August 2008 the Government announced the stadium plans would be 'called in'.
The planned development, including a 50,000-seat stadium, was then examined during a public inquiry which took place between November 2008 and February 2009.
A majority of Everton supporters - 59.27% - backed the move and Knowsley Council were also firmly behind the project, with councillors in favour by 20 votes to one.
However Everton must now reassess their options after their preferred location was ruled out.
Elstone said on www.evertonfc.tv: "Obviously, we are all bitterly disappointed with the decision as we felt that - along with our two partners - we had compiled and presented a most compelling case for the Destination Kirby project.
"We said all along that we not only believed the project to be deliverable but that it would have proved to be hugely beneficial for both Everton Football Club and the people of Knowsley.
"We will now regroup and carefully consider the options which are open to us. I feel I must stress that we do remain totally committed to finding a new home for our football club. The hunt for that new home will now intensify."
Councillor Ron Round, leader of Knowsley Council, said: "We are sorely disappointed with the decision made by the Secretary of State which means that this important regeneration scheme will not go ahead.
"This development would have resulted in many thousands of jobs being created, alongside a range of new facilities and investment coming into the borough."
The move was expected to increase Everton's revenue by around £6million annually, however the cost of stadium construction was estimated at around £80million.
Both Everton and Liverpool, who plan to leave Anfield for a new stadium on Stanley Park, have ruled out the idea of ground-sharing, which could have seen a division in costs.
There had been opposition to the Kirkby move on the grounds it would move the club four miles away from Goodison, and outside the city boundary.
The Government chose to intervene because of concerns the plans could "conflict with national policies on important matters", "have significant effects beyond their immediate locality", and "give rise to substantial regional controversy".
In the decision note, explaining the decision to reject the proposal, the Secretary of State agrees with the Inspector's assessment that "the scale of the development is inappropriate to the role and function of the suburban town of Kirkby".
He also stressed that the impact of a football stadium on the chosen site "would have a harmful effect on the living conditions" of residents in a nearby street due to "loss of daylight and harmful visual impact", and to other residents in an estate on the basis of "noise", while the departure from the stadium of supporters after matches would "have a significant effect on the way in which the town's residents conduct their lives during that time".
The decision can be challenged by a letter to the High Court within the next six weeks.
However there could be hope for Everton, with Denham disagreeing with the Inspector's view that Kirkby cannot house a football stadium.
In the decision note, it is stated that "the Secretary of State does not agree with the Inspector's conclusion that this suburban residential town is not a suitable location for such a large football stadium".
The note continues: "This is because, whilst he shares the Inspector's concerns regarding living conditions and those other concerns identified regarding the stadium, the Secretary of State does not consider that this necessarily precludes an alternative proposal for a stadium within the town of Kirkby coming forward which might be acceptable.
"However, the Secretary of State is clearly not in a position to reach any conclusions on future alternative proposals or appropriate mitigation measures, and were any new schemes to come forward they would need to be considered on their own merits."Reuse content