Owenstown, named after philanthropist Robert Owen, was the brainchild of charity The Hometown Foundation
It planned 3200 new homes near Rigside in South Lanarkshire to be run by a community co-operative.
Robert Owen was the man behind New Lanark, built in the 1700s for the benefit of mill workers and now a Unesco World Heritage Site.
However, South Lanarkshire Council yesterday unanimously rejected the new town after planning officers said it would be against planning policy.
The application, first made in 2009, was deemed "significantly contrary" to the area's development plan and was rejected because of its scale, its impact on roads, limited public transport, and objections from the Forestry Commission and Scottish Natural Heritage.
Michael McGlynn, the council's head of planning, said: "To grant consent would be significantly contrary to planning policy at a national, strategic and local level.
"It would fail to meet the over-arching objective of policy at all of those levels of encouraging sustainable economic growth and regeneration within an improved urban and rural environment.
"The applicants have also failed to show that there is demand for the form and scale of development proposed at this location."
The team behind the project described the decision as a major lost opportunity. Project director Bill Nicol said: "This part of Scotland, and indeed the country as whole, is likely now to lose out on a unique project which would have brought great economic and social benefits.
"These much-needed homes and jobs may now go somewhere else where they'll be welcomed with open arms. We simply can't understand why councillors have thrown this back in our faces."
The Foundation says more than 1500 people from the UK and abroad registered an interest in moving to Owenstown after plans were unveiled in 2009.