Federal Environment Minister Peter Garrett has rejected the controversial Traveston Crossing Dam on the Mary River, south of Gympie.
Mr Garrett said he had made the decision based on science and the "unacceptable impact" it would have on threatened species, including the Mary River turtle and Australian lungfish.
"I'm not satisfied that the impact on the long term survival would be adequately addressed by the mitigation and offset measures proposed," Mr Garrett told a press conference in Brisbane just before 1pm.
"They haven't been proven."
Mr Garrett said the economic benefits of the project did not stack up against the "serious and irreversible adverse effects" on endangered species.
"The fact is that this proposal in my opinion will have unacceptable impacts.
"Australia's environment is of importance to all Australians and those nationally listed species we need to protect to the best possible extent we can.
"I know there has been massive interest in this project . I take my responsibility as Environment Minister very, very seriously."
The former Australian Conservation Foundation president's decision comes after three years of detailed tests and submissions - plus three years of uncertainty for the people of the Mary Valley.
It also follows thousands of submissions from conservationists, wildlife experts, business groups and nearby councils, and a Senate inquiry in 2007.
Mr Garrett made the decision after reviewing a report by Queensland Co-ordinator General Colin Jensen which found the dam was feasible.
However, the Environment Minister said in the material before him, the dam "wouldn't really have been needed until 2026" providing "plenty of opportunity" for the State Government to look for alternatives to secure South-East Queensland's future water supply.
He would not be drawn on the political ramifications for Labor party colleague and state Premier Anna Bligh, saying that had formed no part in his ruling.
"My decision is entirely consistent with the legislation and entirely consistent with my responsibilities as Environment Minister," he said.
Latest estimates show Stage 1 of the project would cost $1.8 billion and provide 70,000 megalitres - or 70,000 Olympic swimming pools - of drinking water as part of South East Queensland's $9 billion water grid.
But conservationists have argued damming the Mary River would pose a major threat to the Australian lungfish, the Mary River turtle, the Mary River cod and the giant barred frog.
On October 7, Mr Jensen gave the proposed dam his tick of approval, but imposed 1200 conditions for the Queensland Government to meet.
Those conditions included a specially-designed fishway and turtle bypass system for those endangered Mary River species, the restoration of about 2000ha of riparian vegetation, and a $10 million project to protect and rehabilitate habitat elsewhere in the Mary River catchment.
Opponents of the dam have called for Premier Anna Bligh to resign.
The Save the Mary River Co-ordinating Group president Glenda Pickersgill said the community would be celebrating today, but had a long recovery ahead. The State Government bought up properties in the Mary Valley when plans for the dam were announced and needed to offer financial help.
"I'm absolutely thrilled. I'd like to give a huge thank you to Mr Garrett for taking the science into account and all of his department," Ms Pickersgill said.
"There has been an enormous amount of damage done over the past three and a half years and we will need their help.
"The community has a vision for the Valley that it wants to see sustainable agriculture that we can look after the environment and the river."
Other than the ruling Queensland ALP, all political parties have opposed the dam.
At the State Election in March, Queensland's Environment Minister Andrew McNamara lost his seat of Hervey Bay largely because of the anti-dam mood of his electorate.
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