The 181-turbine wind farm was to be located on the Western Isle of Lewis across areas to the north and west of Stornoway.
However Scottish ministers decided that the project would have a serious negative effect on the Lewis Peatlands, a designated Special Protection Area home to high numbers of rare and endangered bird species.
Scottish Energy Minister, Jim Mather, said: "This decision does not mean that there cannot be onshore wind farms in the Western Isles. I strongly believe the vast renewables potential needs to be exploited to ensure that the opportunities and benefits of new development can be shared across the country in an equitable fashion."
Lewis Wind Power estimated that the wind farm's output could comprise 36% of Scotland's target of 18% of its total energy consumption originating from renewable sources by 2010.
The project was also expected to rejuvenate the local area and provide opportunities for members of the community to take up ownership stakes.
An LWP spokesman said: "The economic benefits included the creation of around 400 local jobs, 680 jobs across Scotland, during the construction process, as well as providing much needed investment to the Arnish Yard to make it a global competitor for other projects."
"Sadly all of this has been lost because of the government decision which, we believe, represents a huge missed opportunity."