It followed concerns about the environment and conservation of the 90-hectare Chat Moss site.
The Secretary of State for Communities and Local Government Eric Pickles has turned down the firm's appeal against the decision.
The ruling follows a public inquiry held in March.
It concludes: "The government's view is that the use of peat in horticulture is unsustainable and it has also to be set against the consequences of peat extraction on climate change and biodiversity."
There were nearly 600 objections to the work from environmental groups, who argued it would release huge amounts of carbon dioxide into the atmosphere.
Lancashire Wildlife Trust has bought part of the land to turn into a nature reserve.
William Sinclair Horticulture MD Bernard Burns said Pickles' ruling found that extraction of peat was allowable from previously used sites but that the minister had decided extraction would "frustrate moves from peat to non-peat".
Burns said because less than 10 per cent bought in England is harvested in England, and the ruling only applied to England, it would mean greater CO2 emissions from importation of peat, which Sinclair is now bringing in from Scotland and Canada. He added: "The CO2 argument is not rational."
Friends of the Earth’s North West Regional Campaigner Helen Rimmer said: "It’s a huge relief that common sense has prevailed and Eric Pickles has refused to allow further peat extraction at Chat Moss.
See www.communities.gov.uk/planningandbuilding/decisionsplanning/secretarystate/recentsecretary/
