Hundreds of residents objected to the proposals for a road-to-rail scheme, which would have seen a 17-metre high waste transfer depot created on part of the former rail freight yard off Sir Harry Lauder Road.
The scheme was rejected by the city council in 2008 but the company behind the plans, Viridor, lodged an appeal against the decision with the Scottish Government.
A public inquiry was held earlier this year, and the Scottish Government yesterday said it had decided to uphold the refusal of planning permission.
Viridor, which argued that the depot was vital to Edinburgh's hopes of meeting future environmental targets, said the decision was "a bitter blow", adding that they would now consider their options.
In their decision, reporters Oonagh Gill and Karen Heywood stated that the development would have had "a negative impact of considerable significance on the character and amenity of Portobello Conservation Area".
They also said it was "difficult to conclude that there is an explicit need in the public interest for a standalone transfer station in this location and of the scale proposed." The result is a huge relief for community campaigners, who have been fighting the scheme since it was first proposed in 2007.
They had argued that as well as the imposing structure, the waste depot would have seen hundreds of lorries coming in and out of the site, creating excess dirt, noise and disturbance near residential areas. Frances Wraith, a member of the campaign group Portobello Opposes New Garbage Site (Pongs), said: "It is a huge relief and obviously we are very pleased.
"The community was incredible in the way they fought this, as we had to raise a lot of money to pay legal costs."
Edinburgh East MP Sheila Gilmore also welcomed the decision, saying: "This plant was wrong for Portobello – it would have blighted views of historic parts of Portobello, and could have led to an additional 900 truck journeys through the town every day, leading to a huge rise in pollution and congestion.
"This is a great victory for Pongs. They have run a well-organised community campaign."
Colin Paterson, Viridor's Scottish regional director, said: "Viridor is clearly disappointed with the decision by Scottish ministers to refuse the road-to-rail waste transfer station.
"It's a bitter blow on the very day the Scottish Government launched its Zero Waste strategy which extends national targets to include business waste and is clear both on the need for 'next generation' facilities, and for private sector investment to turn the policy into practice.
"As Scotland's leading recycling and waste management company, Viridor has committed to the challenge by announcing investment of up to 800m in Scotland over the next five years.
"It's hard to believe, therefore, that the Scottish Government has allowed the planning system to stall development."
In relation to further steps, Mr Paterson added: "Viridor remains committed to supporting sustainable domestic and commercial recycling and resource management in Edinburgh. As such, we will reflect on this decision and our options in due course."