The Nobel Foundation's project, designed by British architect David Chipperfield, is planned to become a gilded building located along the Stockholm waterfront and would see a 19th century customs site demolished.
The Nobel Center has many critics because of its planned size, location and colour.
The Land and Environment Court of Appeal ruled that the building “would affect the readability of Stockholm's historical development as a port, shipping and trading city”.
The court said the construction would “cause significant damage” to the preservation of Blasieholmen's cultural heritage and environment.
Project supporters said they would appeal the ruling to a higher court as a last resort.
King Carl XVI Gustaf, who is usually reserved on public affairs, told the daily Dagens Nyheter in June 2016 that the building would be “gigantic” and “too dominant”.
The city council in 2016 approved the construction and design, which was so large that it had to be cut down by one floor.
Before court proceedings began, the Nobel Foundation had been hoping to start work in 2017.
The Nobel Center aims to hold ceremonies, scientific seminars, exhibitions, lectures and discussions, but not the Nobel banquet which is held every year at the Stockholm City Hall.
The project will be part financed by the Wallenberg family, one of the richest in Sweden, and by the Persson family, which controls the H&M high street fashion chain.