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The post has gone instead to Scotland Yard's Acting Deputy Commissioner Bernard Hogan-Howe, the Home Office said today.
The no-nonsense former Merseyside Police chief was parachuted in to his current role with Britain's biggest force after former commissioner Sir Paul Stephenson and former assistant commissioner John Yates quit in quick succession.
Mr Hogan-Howe beat Mr House, Acting Scotland Yard Commissioner Tim Godwin and Sir Hugh Orde, president of the Association of Chief Police Officers, to the job after several rounds of interviews with the Home Office and Metropolitan Police Authority.
The authority was eager to secure a speedy replacement for Sir Paul in the wake of the phone hacking scandal and rioting crisis.
Mr Hogan-Howe will take over the Metropolitan Police on a five-year contract, worth around £260,000 a year.
In a statement, Mr House said: "As you would expect, I am disappointed that I was unsuccessful in my application for the job. However, in Bernard, the people of London have an outstanding police officer and I am sure that he will be a great success in the role.
"As I said at the time of my initial application, I have always been committed to Strathclyde Police and to keeping people safe in our communities. That commitment has not wavered. I look forward to continuing to lead this outstanding organisation and to being fully engaged in the process of establishing the new Scottish Police Service."
Mr House has been strongly tipped to take a leading role as Ministers seek to amalgamate the existing eight Scottish forces into one.
In London, Home Secretary Theresa May and London Mayor Boris Johnson gave shortlisted applicants a final chance to impress at interviews this morning before deciding on the new commissioner.
Mrs May said: "I am delighted to announce Bernard Hogan-Howe as the new Commissioner of the Metropolitan Police.
"As you would expect for such a prestigious position, we had an exceptional field of candidates, but Bernard Hogan-Howe impressed us all with his vision for the Metropolitan Police, his commitment to cutting crime and the important work he has done for the public.
"I made my recommendation following representations from the Metropolitan Police Authority and discussions with the mayor of London, Boris Johnson."
She went on: "The Government's reforms are transforming the police in this country and Bernard Hogan-Howe has the skills and experience needed to ensure the nation's biggest force is at the forefront of this change.
"London is a great city and will next year host the biggest sporting event in this nation's history. I am confident he will lead the fight against crime with determination and vigour."
Mr Johnson said Mr Hogan-Howe will oversee a "new, more transparent era for the Met".
He added: "Londoners deserve strong and dynamic leadership at the helm of the country's largest and most industrious police force, and today I'm pleased to welcome the appointment of Bernard Hogan-Howe as the man I believe will deliver the firm, strategic lead our great city needs.
"Public confidence is paramount for any police force and Bernard Hogan-Howe has the impressive track record to restore confidence and crack down on violent crime and disorder.
"Over recent weeks London has faced immense policing challenges and I truly believe that Bernard Hogan-Howe has the sound expertise to handle critical issues and keep our streets safe.
"It's no secret that I desired someone who has a clear strategy for tackling gang violence and youth crime and restoring pride in our great city.
"I have every confidence in him and more importantly I believe the public will begin to notice a number of positive changes over the next few months.
"Bernard Hogan-Howe has made it clear that this will be a new more transparent era for the Met, making the police more accountable to the public, and strengthening police and public relationships."