The long-awaited decision was a blow to Canada's new leader, Prime Minister Justin Trudeau, and pipeline operator TransCanada warned that it may file an application to renew the project.
But Obama, with one eye on the upcoming global climate change summit in Paris, said Keystone "would not serve the national interests of the United States" and could prove an environmental hazard.
"America is now a global leader when it comes to taking serious action to fighting climate change," he said. "Frankly, approving this project would have undercut that global leadership." (READ: Obama vetoes Keystone XL pipeline, leaving it in limbo)
Trudeau, just two days into the job as Canada's premier, expressed disappointment at the decision – which cuts off a potential key export route for Canadian oil – but was philosophical.
"The Canada-US relationship is much bigger than any one project and I look forward to a fresh start with President Obama to strengthen our remarkable ties in a spirit of friendship and cooperation," he said.
Although the decision was not a surprise, TransCanada's shares fell sharply and the company quickly vowed to resurrect its bid, implicitly suggesting Obama's 2017 successor my revive the plan.
"TransCanada and its shippers remain absolutely committed to building this important energy infrastructure project," chief executive Russ Girling said.
Public opinion has been divided over the project on both sides of the border, and for many, the debate has become a proxy for one on the broader issues of climate change and pollution from Canada's tar sands.
Girling alleged that "misplaced symbolism was chosen over merit and science" in rejecting the project, but Obama was able to cite the detailed conclusions of a large-scale US government investigation.
Obama said that – instead of bringing heavy tar sands crude 1,179 miles (1,900 kilometers) from Alberta to the Gulf of Mexico – the US should develop clean technologies that would bring jobs and energy security.
At the end of the month, Obama will travel to Paris to help ink a global climate accord aimed at limiting carbon emissions worldwide.
He said he had called Trudeau and both leaders agreed to work together on energy and climate issues.
US Republican Senate Leader Mitch McConnell was less sanguine about the decision.
He accused Obama of being "more interested in appeasing deep-pocketed special interests and extremists than helping tens of thousands of Americans who could have benefited from Keystone's good jobs."
Environmental group Friends of the Earth said it was a victory for the "fight against fossil fuels" – boasting that "a routine decision to approve a pipeline" had been transformed "into a leadership test on climate change."
In his remarks – made at the White House, flanked by both Vice President Joe Biden and Secretary of State John Kerry – Obama suggested he thought lobbying efforts on both sides had gone too far.
"For years, the Keystone pipeline has occupied what I, frankly, consider an overinflated role in our political discourse," Obama complained.
"It became a symbol too often used as a campaign cudgel by both parties rather than a serious policy matter," he said, adding it was neither the "silver bullet for the economy, as was promised by some, nor the express lane to climate disaster proclaimed by others."
Calgary-based TransCanada has spent the last 7 years trying to get the project built and said Friday after the decision that it may try to make another proposal.
But until today, Obama's White House has adamantly refused to take a public stance, with Obama hiding behind a tortured bureaucratic process led by the US State Department.
That review, Kerry said, has now concluded that the environmental risks of the pipeline outweigh any possible economic benefits to the United States.
"While it would facilitate the transportation to the United States of one of the dirtiest sources of fuel on the planet, the proposed project by itself is unlikely to significantly impact the level of crude extraction or the continued demand for heavy crude oil at refineries in the United States," he said.
In recent weeks, Obama's silence had become increasingly uncomfortable, with the Paris meeting nearing and Democratic presidential candidate Hillary Clinton – who once led the review as secretary of state – saying it should not be approved.
TransCanada earlier this week had tried to halt the review, a move that was rejected by US government lawyers and now appears to have been an attempt to avert outright rejection. – Andrew Beatty and Dave Clark, AFP/Rappler.com