"The pipeline would not make a meaningful long-term contribution to our economy," Obama told a press conference. He said it would not reduce gasoline prices, and shipping "dirtier" crude from Canada would not increase U.S. energy security.
The denial of TransCanada Corp's more than 800,000 barrels per day project will make it more difficult for producers to develop the province of Alberta's oil sands. It could also put the United States in a stronger position at global climate talks that start in Paris on Nov. 30 in which countries will aim to reach a deal to slow global warming.
U.S. Secretary of State John Kerry, who determined the pipeline was not in the country's interest before Obama's final decision, said approving Keystone "would significantly undermine our ability to continue leading the world in combating climate change."
Keystone XL would have linked existing pipeline networks in Canada and the United States to bring crude from Alberta and North Dakota to refineries in Illinois and, eventually, the Gulf of Mexico coast.
TransCanada first sought the required presidential permit for the cross-border section in 2008 but the proposal provoked a wave of environmental activism that turned Keystone XL into a rallying cry to fight climate change. Blocking Keystone became a litmus test of the green movement's ability to hinder fossil fuel extraction in Canada's oil sands.
"This is a big win," said Bill McKibben, co-founder of the environmental group 350.org which helped make Keystone a symbol of a movement to slow global oil output. Obama's decision "is nothing short of historic, and sets an important precedent that should send shockwaves through the fossil fuel industry."
TransCanada and other oil companies said the pipeline would have strengthened North American energy security, created thousands of construction jobs and helped relieve a glut of oil.
But since 2008 the United States has experienced a domestic drilling boom which has boosted oil production 80 percent and contributed to a slump in U.S. oil prices from above $100 a barrel to about $44.
Newly sworn in Canadian Prime Minister Justin Trudeau, a supporter of Keystone, voiced disappointment but said the Canada-U.S. relationship "is much bigger than any one project."
TransCanada Chief Executive Russ Girling said the company would review its options to potentially file a new application for a pipeline to bring oil sands crude to the United States.
"Today, misplaced symbolism was chosen over merit and science, rhetoric won out over reason," he said in a statement.
A senior U.S. State Department official left open the possibility TransCanada could seek a different decision under another U.S. administration, telling reporters: “for the State Department to reconsider the application at any time, the company would have to reapply.”
TransCanada had asked the Obama administration on Monday to pause the review in a move seen by many as an attempt to postpone a decision until a new U.S. president took over in 2017. TransCanada shares fell 5.2 percent on the Toronto stock exchange on Friday to C$42.90.
All the Democratic U.S. presidential candidates, including front runner Hillary Clinton, oppose the pipeline while most Republican candidates are in favor.
Friday's rejection was a loss for Republicans on Capitol Hill who in January had made Keystone their top issue of the new Congress. They passed a bill that would have allowed Congress to decide on the pipeline, legislation Obama vetoed.
Senator John Hoeven, a Republican of oil-producing North Dakota, said TransCanada would be able to challenge the decision under international trade agreements such as NAFTA or the World Trade Organization.
Obama's decision will have a “chilling effect” on any company considering building energy infrastructure, which could leave the United States at risk in the long term of not having the pipelines it needs, Hoeven said in an interview.