Michael Ross, who was found guilty of shooting Shamsuddin Mahmood in 1994, has been told his conviction was not a miscarriage of justice.
The Scottish Criminal Cases Review Commission (SCCRC), which examines potential wrongful convictions, has ruled that it will not refer Ross's case for a fresh appeal.
The Justice for Michael Ross campaign said the former army sniper was "disappointed but remaining strong" and had vowed to fight on to secure his freedom.
The 1994 assassination of Mr Mahmood, in the Mumutaz Indian Restaurant in Kirkwall by a man wearing a balaclava to hide his face, was said to have been motivated by racism on the part of Ross, who was 15 at the time.
But the former Black Watch platoon sergeant, who had become a war hero by the time he was convicted 14 years after the killing, has always denied being the masked murderer.
Ross's father Eddy, a former policeman who claims he was wrongly convicted of impeding the investigation into the murder, said he and Ross's mother Moira were saddened by the SCCRC decision.
He said: "This is not the end of the road. The fight will go on."