The East Riding of Yorkshire Council refused planning permission for the scheme at North Ferriby, near Hull, in May 2013.
The developer St Modwen appealed to the Secretary of State for Communities and Local Government Greg Clark, who has rejected the plan.
The company said it was disappointed and is considering its options.
The Melton Fields project would have consisted of 510 houses and a care home. The company also applied for permission for an alternative smaller scheme of 390 homes.
Villagers mounted a campaign against the development, with more than 1,200 people writing letters objecting to the plans.
East Riding council rejected both proposals claiming the land had been earmarked for employment rather than residential use.
The developer appealed against the council's decision to the government's Planning Inspectorate, which held a public inquiry last year.
Councillor John Mabbett, vice chairman of North Ferriby Parish Council, described the secretary of state's refusal as "a victory for common sense".
"Had this ill-conceived development been approved our community would have been overwhelmed by its size and the fabric and character of the village would have been harmed for ever," he said.
A spokesperson for St Modwen said: "We firmly believe that our proposals for a residential development represent the most viable option for the site, and for the region.
"Our proposals would not only deliver much needed family homes, but also bring important investment and jobs to the local area."

The bird's head and wings became stuck in the wire fence in Bethesda while it was chasing a wood pigeon.
RSPCA Inspector Mike Pugh, who freed the animal, said: "The buzzard was feisty, but luckily, had not had much feather damage.
"I released the bird back to the wild where he belongs straight away."

The 24-year-old summer signing injured himself in training on Friday as he went to take a shot and will see a consultant this week.
He joins Ryan Brunt and left-back Gary Sawyer as long-term absentees.
"It's a huge blow, any players we have in the squad that are injured is very disappointing for us," manager Derek Adams told BBC Radio Devon.
Spencer had become first choice in the central striking role of the League Two leaders following an injury to on-loan Bristol City forward Paul-Arnold Garita, who has just returned to fitness.
"He and Garita have played in that area this season and held the ball up and performed well for us," Adams added following Saturday's 3-0 home loss to Grimsby.
"It's hard to take as a manager because you feel that you're getting somewhere and then something happens, it's like a roadblock, it's very difficult to overcome these things, so it's hard to take."
The government has turned down plans to build more than 500 homes near an East Yorkshire village.
[NEXT_CONCEPT]
A buzzard has been rescued after becoming trapped between fencing and a wall in Gwynedd.
[NEXT_CONCEPT]
Plymouth Argyle striker Jimmy Spencer will miss at least three months after breaking and dislocating his ankle.