St Davids should have been given city status in 1992 to mark the 40th anniversary of the Queen's coronation, according to newly released documents.
In a government letter that year, the then Welsh Secretary David Hunt said the Pembrokeshire cathedral town should be given its "rightful title".
The Queen, in conjunction with UK ministers, chose only Sunderland, in north-east England, for the honour.
St Davids was made a city in 1994, to mark its role in Christian heritage.
As part of the commemorations of the 40th of anniversary of the Queen's accession to the throne, it was decided that one city in England and Wales would be given the status.
Writing in January 1992 to Kenneth Baker, the home secretary at the time, Mr Hunt said a "special case" should be made for St Davids.
Mr Hunt said: "In the case of St Davids, I believe there is very strong support in Wales for recognising formally what has, for many generations, been regarded in the public mind as a rightful title.
"Most people in Wales and elsewhere in Britain, already regard St Davids as a city, by virtue of its cathedral."
He added: "There will be many who find it hard to understand the reasons why its appeal should be turned down."
The appeal was turned down and city status was given to Sunderland. However the decision was questioned by Prime Minister John Major's private secretary, Judith Chaplin.
In a Downing Street memo, she said this was "an odd decision politically" as Sunderland was represented by two Labour MPs.
Mrs Chaplin felt the award should go to Wolverhampton, where one Conservative MP, Maureen Hicks, was "hanging on for dear life".
Two years later, St Davids became a city in honour of its role in Christian heritage.