The amnesty would have applied to offences committed during the political turmoil after Thailand's 2006 coup, which ousted Mr Thaksin.
The bill's passage in the lower house triggered large street protests.
And on Monday, as the bill went to the Senate, tens of thousands of protesters took to the streets of Bangkok.
Prime Minister Yingluck Shinawatra - who is Mr Thaksin's sister - has promised to respect the Senate's decision.
The bill, which was proposed by the governing Pheu Thai party, applied to offences committed during the upheaval after Mr Thaksin was removed from office.
Ms Yingluck's government had argued that the legislation was a necessary step towards reconciliation, after several years of political turmoil.
This turmoil included the occupation of Bangkok's main airport in 2008 and then two months of street protests in Bangkok in 2010 that left about 90 people - mostly civilian protesters - dead.
But critics said it would allow human rights abuses - such as the killing of civilian protesters - to go unpunished.
The main opposition Democrat Party also believed it was aimed at allowing Mr Thaksin to return to Thailand without having to serve a jail sentence.
Mr Thaksin has been in self-imposed exile since his conviction on corruption charges over a property deal. He argues the charges are politically motivated.
The lower house backed the bill, despite an opposition boycott. But as protests gathered strength, the governing party withdrew its support from the bill and all 141 senators present voted against it.
"This house rejects this bill for consideration," said Deputy Senate Speaker Surachai Lengboonlertchai.
As tens of thousands of anti-government protesters remained on the streets in parts of Bangkok on Monday night, a spokesperson for the Pheu Thai party said the governing coalition would not bring the amnesty bill back to parliament.
"We believe from tomorrow the political crisis will start to ease as there are no reasons to maintain the protest," said Pormpong Nopparit.
But the opposition has urged its supporters to observe a three-day national strike, beginning on Wednesday, in what correspondents say has turned into a campaign to bring down the government.
Former leader Thaksin Shinawatra is a deeply polarising figure in Thai politics.
He drew huge support from Thailand's rural poor but strong opposition from other sectors in society, and the divisions dating from the 2006 coup continue to dominate the political landscape.

Jeremy Zeid, who was standing in Hendon, said President Obama should be "locked up" by the Israelis for "leaking state secrets".
He was referring to the declassifying of documents on Israel's secret nuclear programme.
UKIP said Mr Zeid resigned last week due to health issues.
It is not clear exactly when he resigned, but he made the posts last Wednesday and Thursday.
Raymond Shamash, a surgeon originally from north-west London, was revealed as Mr Zeid's replacement after news of the Facebook posts emerged.
Mr Zeid also said Israel should "do an Eichmann" on President Obama.
Adolf Eichmann was a Nazi war criminal abducted by Israeli agents in 1960 and later hanged for his role in the murders of millions of Jews in World War Two.
Hendon is one of the most marginal seats in the country with the Conservatives defending a majority of 106.
Thailand's Senate has rejected a controversial amnesty bill that could have led to the return of former Prime Minister Thaksin Shinawatra.
[NEXT_CONCEPT]
A UKIP parliamentary candidate who said in a Facebook post that Israel should "kidnap" US President Barack Obama has been replaced by his party.