Camelot failed in his bid to become the first Triple Crown winner since Nijinsky in 1970 as Encke claimed the Ladbrokes St Leger at Doncaster.
Camelot, trained by Aidan O'Brien and ridden by Joseph O'Brien, raced towards the rear through the early stages but made smooth progress at the half-mile pole.
All seemed to be going well as he was eased out to make his challenge two furlongs from home but Mickael Barzalona appeared to steal a slight march on Mahmood Al Zarooni's 25/1 chance Encke, who went clear.
Camelot (2/5 favourite) gave chase but never looked like he would quite get there, finishing three-quarters of a length in arrears.
Victory in the world's oldest Classic comes as further affirmation of Barzalona's prowess in the saddle.
Last year, the Frenchman landed the Epsom Derby on Pour Moi for Andre Fabre, famously standing up in the irons to celebrate before the line.
For Camelot, who did not appear to travel with quite his usual zest at some points of the race, it was so near, so far as the 2000 Guineas and dual Derby hero came up just short in his date with destiny.
Leger success would have made O'Brien the first man to train all five British Classic winners in a season.
John Gosden's Michelangelo was third under Frankie Dettori, a further three lengths away.
O'Brien said: "It wasn't what we thought it was going to be. It was a steadily-run race and Joseph said he was a little bit fresh with him, but that was probably always going to happen in a slowly-run race.
"You have to take your time on him over a mile and six which he (Joseph) did and when he got out he just stayed on rather than quickened.
"In the Guineas he quickened and in the Derby he quickened, but he just stayed on here.
"He ran a great race but just got beat. It's disappointing for everybody but that's the way it is. That's racing.
"We expected him to win and if I thought they were going to go that steady I would have had a pacemaker in or two pacemakers. But that's my fault.
"I was sure they were going to go a pace, but that's the way it was."
O'Brien went on: "The Camelot we would have known over a mile, mile and a quarter and a mile and half would have quickened up. Today he just kept going and going.
"I'm not sure if he'll run again this year. If I thought there was a chance he was going to stay in training next season he might not run.
"But I don't know. It will be boys' (Coolmore, owners) decision."
Godolphin racing manager Simon Crisford heaped praise on Barzalona as Sheikh Mohammed's operation won the Leger for the sixth time.
He said: "It's absolutely fantastic. This is a robust horse and we put a line through his run at York (defeat in the Great Voltigeur). The pace was so slow that day and it was falsely-run race.
"Mahmood had been very happy with his work in the build-up to the Leger and Sheikh Mohammed gave the green light to run him.
"Mickael rode a beautiful race and when he kicked at the two-pole he put the race to bed really.
"We weren't sure about his stamina going into the race but he's quite stoutly bred, so we thought it wouldn't be a problem.
"What we loved about that race was the turn of foot he showed, that stands very well for next season and he will stay in training.
"I would imagine it's very unlikely (that he will run again this season) but we will see what Sheikh Mohammed wants to do."