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 government has turned down plans to build more than 500 homes near an East Yorkshire village.