Shares fell nearly 6% after it said it had considered the latest offer and consulted with major shareholders but found it failed to address key issues. Carillion shares fell 2%.
The issues include disagreement over the future of Balfour's US business Parsons Brinckerhoff, which it is trying to sell.
The firm also said the new terms were only a "small value change" compared to the previous proposal, casting doubt on Carillion's calculations about how much the deal would be worth to Balfour investors.
"The board has unanimously concluded that the proposal is not in the best interests of its shareholders and has decided to reject the proposal," the company said.
It said it would not be seeking an extension to the "put up or shut up" deadline under takeover rules that expires tomorrow at 5pm.
The rejection comes a day after Carillion made a sweetened offer which it indicated valued Balfour at £200 million than it had done before, urging the company to re-open talks and extend the time limit.
Chairman Philip Green highlighted "the scale of the prize for shareholders" of both companies from a merger.
Wolverhampton-based Carillion claims a merger could yield £175 million a year in cost savings though Balfour has previously cast doubt on this figure.
Balfour's rejection also called into question the way its suitor had calculated the increase in value of the all-share offer, which would also see shareholders receive a £59 million dividend pay-out.
It said the new proposal only amounted to a £55 million improvement on the last.
Balfour also again voiced concern about the business plan which it said would significantly reduce the scale of its UK construction business at a time "when it is poised to benefit from a recovery in the market".
A key stumbling block for the merger has been Balfour's sale of Parsons Brinckerhoff, which Carillion says should not go through in the event of a tie-up. It has offered to cover bidders' reasonable costs of up to £10 million.
But Balfour said the sale was "reaching a successful conclusion" at an attractive value which would return up to £200 million to its shareholders.
It said it would "continue to be focused on delivering its standalone strategy" as set out in its interim results last week.
The results showed a 53% slump in half-year profits. Balfour is still looking for a new chief executive after the departure of Andrew McNaughton earlier this year following a profit warning.