The Court of Appeal has refused the government permission to take its fight to remove Abu Qatada from the UK to the Supreme Court.
Home Secretary Theresa May had wanted the UK's top court to overturn a decision by a lower court to halt the cleric's deportation.
Mrs May could still petition the Supreme Court for an appeal directly.
The cleric faces retrial on terrorism-related charges in Jordan. Labour said Mrs May's strategy had failed.
Home Office minister Mark Harper said this decision was "not the end of the legal road".
He told the Home affairs select committee the government was "obviously disappointed" but ministers were committed to deporting Abu Qatada, who they still considered to be a "dangerous man".
Mrs May will make a statement to the Commons on Wednesday on the case.
Last year, the Special Immigration Appeals Commission (Siac), which adjudicates on national security-related deportations, said Abu Qatada should not be removed from the UK because his retrial could be tainted by evidence obtained by torturing the cleric's former co-defendants.
The home secretary had unsuccessfully argued to Siac she had obtained fresh assurances that would guarantee the fair treatment of the preacher on his return to Amman.
During the Court of Appeal hearing, the government argued Siac had taken an "erroneous" view of the situation in Jordan and legal tests to assess the conditions Abu Qatada could face.
Lawyers for the home secretary said Jordan had banned torture and the use in trial of statements extracted under duress.
But in their judgement the judges said Siac had been entitled to think there was a risk the "impugned statements" would be used in evidence during a retrial and there was "a real risk of a flagrant denial of justice".
They said the court accepted Abu Qatada "is regarded as a very dangerous person", but that was not "a relevant consideration" to whether his deportation would result in breaching human rights.
"Torture is universally abhorred as an evil," said the judges. "A state cannot expel a person to another state where there is a real risk that he will be tried on the basis of evidence which there is a real possibility may have been obtained by torture. That principle is accepted by the secretary of state and is not in doubt."
Shadow home secretary Yvette Cooper called on the Mrs May to "tell us urgently what she is going to do now to get Abu Qatada deported or tried, and keep him off our streets".
"Theresa May failed to appeal against the European Court decision last year," she said.
"It is no good the home secretary blaming the court when she didn't appeal when she had the chance. Instead the home secretary went back to square one in the British courts instead, insisting with great fanfare that her legal strategy would work.
"But she also failed to get sufficient assurances from Jordan to convince the British courts."
Abu Qatada was re-arrested and returned to Belmarsh prison in March, following an alleged breach of bail conditions, concerning the use of communications equipment at his home.
The Metropolitan Police said his breach followed an investigation into whether he was party to the publication of extremist internet material in his name.
If the police arrested and charged him with an offence in relation to that investigation, or another accusation, they could ask a judge to remand him in prison before trial.