The £75 million Wirral project was set to be the biggest development in the peninsula's history but the architect and developer, Neptune, were dealt a significant blow after Whitehall rejected it.
This is the second time Neptune has become involved in a contentious scheme in the North West, with the developer currently working with Broadway Malyan on its controversial Fourth Grace plans for Liverpool's waterfront.
The major stumbling block with the New Brighton scheme was the plan to replace the current marine lake, which the inspector's report states, 'contributes substantially to the setting of the Fort Perch Rock and Perch Rock Lighthouse - both Grade II-listed buildings.'
The report adds that 'the loss of the existing lake would change the distinctive character of the New Brighton waterfront, and this would not be compensated for by the replacement lake'.
The document said the proposal 'could diminish the quality and character of the resort overall'.
The scheme has attracted severe criticism from local residents, and this most recent report will send the developers back to the drawing board.
Neptune managing director Steve Parry said: 'We are naturally disappointed by the outcome. We have been actively engaged with New Brighton for five years, and our commitment to its regeneration remains undiminished.
'We will consult with the council and the other local stakeholders and explore how best to amend our proposal and deliver a new future for New Brighton,' he said.