The Federal Institute of Pharmaceuticals (BfArM) has rejected plans for legal cannabis sales in Berlin's Kreuzberg-Friedrichshain district, Kreuzberg-Friedrichshain mayor Monika Herman of the Green Party announced on Monday.
The borough submitted plans for four "specialist cannabis shops" back in June.
But cannabis campaigners say that they will keep fighting.
"For us, the rejection of the plans was no surprise, and as such, it's also not a setback," Georg Wurth, spokesperson for the German Hemp Association, told The Local.
With similar proposals now being looked at in Hamburg, Bremen, Münster and Düsseldorf, "political pressure is rising from below," he said.
Würth said that Kreuzberg-Friedrichshain has already launched legal action to contest the decision - adding that it will be "interesting to see now what the judges have to say on the issue."
"Why was a heroin pilot project possible in Germany, but a similar scheme for cannabis prohibited?" he asked.
If the plans had been accepted, licences to sell the drug would have been granted to pharmacies, headshops and addiction help centres.
The cannabis would be produced in Berlin and Brandenburg, and only sold to residents of Kreuzberg-Friedrichshain over the age of 18.
It was hoped that opening the shops would diminish illegal trade in the drug, reducing its availability to teens and young people and lessening the overall health risk for consumers.
In Amsterdam, cannabis coffee shops have been a part of city culture since the 1970s. With over 200 across the city, Amsterdam coffee shops operate under set, non-transferable licences.
A similar set-up in Berlin would be in the public interest, proposers argued.
Green hobby horse
In 2014, party leader Cem Özdemir had himself filmed doing the Ice Bucket Challenge - with a tall cannabis plant in plain view on his balcony beside him.
By Hannah Butler