Presidential spokesman Thabo Masebe said the Tibetan spiritual leader and Nobel Laureate did not receive a visa because it was not in South Africa's interest for him to attend.
Citing how much the African nation has gained in its trading relationship with China, Mr Masebe believes that, if the Dalai Lama attended the conference, the focus would shift away from the 2010 World Cup.
The Dalai Lama's fellow laureates, Archbishop Desmond Tutu, and former South African president FW De Klerk, said they will boycott the event in protest to the decision.
Mr De Klerk said that the decision to refuse the visa made a 'mockery' of the peace conference.
'The decision to exclude the Dalai Lama is irreconcilable with key principles on which our society is based including the principles of accountability, openness and responsiveness and the rights to freedom of expression and free political activity,' he said.
'South Africa is a sovereign constitutional democracy and should not allow other countries to dictate to it regarding who it should, and should not admit to its territory - regardless of the power and influence of the country.'
A representative of the Dalai Lama said he was not surprised by the decision.
The Tibetan government in exile thinks that China has pressured many countries to refuse a visit by the Dalai Lama, according to Chhime Chhoekyapa, an aide in Dharamsala, India.
The Dalai Lama fled China in 1959 after a failed uprising against Chinese rule.
The peace conference was billed as an opportunity to showcase South Africa's role as a human-rights champion ahead of its hosting of soccer's World Cup next year.
Now it may face a large exodus of attendees as most people associated with the Nobel prize have backed out.
'It is disappointing that South Africa, which has received so much solidarity from the world, doesn't want to give that solidarity to others,' Nobel Institute Director Geir Lundestad said, referring to the decades-long fight against apartheid.
Last week marked the one-year anniversary of anti-government riots in Lhasa, Tibet's regional capital, and 50 years since the Dalai Lama escaped into exile in India after Chinese troops crushed a Tibetan uprising.
China claims Tibet as part of its territory, but many Tibetans say Chinese rule deprives them of religious freedom and autonomy. Beijing accuses the Dalai Lama of pushing for Tibetan independence and fomenting anti-Chinese protests.
South Africa decided last month to refuse to issue an official invitation, without which, Mr Masebe said, the Dalai Lama cannot visit.
Mr Masebe said the spiritual leader had been welcomed twice previously in South Africa and would be welcome again in the future - but 'not now, when the whole world is looking at South Africa.'
Beijing, an ally when South Africa's now-governing African National Congress was a liberation movement, and Pretoria have diplomatic ties stretching back a decade and an economic relationship based on trade as well as aid.
Critics say China's investment in and aid to Africa, ranging from building presidential palaces and sports stadiums to rail and road projects, aims to secure access to the continent's natural resources.
African governments, though, are eager for the funds and counting on continued Chinese investment despite the global economic meltdown.
Samdhong Rinpoche, the prime minister of the Tibetan government-in-exile, said South Africa was under pressure from Beijing and its decision to bar the Dalai Lama was a business matter.
'South Africa is a newly emerging country and China is giving it considerable economic resources so it is understandable,' he said Monday in Dharmsala, India. 'Every country has to protect its economic and political interests.'
Mr Masebe insisted that his government was not bowing to pressure from China.
'We make our own decisions,' he said.
Masebe said if conference organizers had talked with officials beforehand, they would have been advised to exclude the Dalai Lama and the controversy could have been avoided.
But Kjetil Siem, chief executive officer of South Africa's Premier Soccer League, said the Dalai Lama was invited in a routine way along with other Nobel laureates.
