Kevin Cardiff's nomination to the European Court of Auditors has been rejected by the European Parliament's Committee on Budgetary Control by just one vote.
The Secretary General of the Department of Finance had been nominated for the position by the Government.
Mr Cardiff appeared in front of the committee before it voted in a secret ballot this afternoon.
A Government spokesperson said it had received notice of the outcome of the vote and will be taking it under consideration.
Mr Cardiff's candidacy was overshadowed by the controversy over his role in the €3.6bn accounting error that came to light last month and over his role in the events that led to the collapse in the Irish banking sector.
Only two other nominations to the European Court of Auditors have ever been rejected. It was the first occasion an Irish nominee had not secured parliament support.
Fianna Fáil MEP for Ireland North West Pat 'The Cope' Gallagher said it was a bad day for Ireland.
He said Mr Cardiff performed admirably in the committee, gave an excellent presentation and was open, honest and frank.
The MEP said Mr Cardiff was equal to any of the other seven nominees who were recommended by the committee.
Asked why he felt Mr Cardiff did not get the nomination, Mr Gallagher said: "He was the meat in the sandwich."
Labour MEP for Ireland East Nessa Childers said it was quite shocking that Mr Cardiff had not been passed by the committee.
She said while she had opposed his nomination, she had spoken with him directly today to explain her reasoning.
Ms Childers said, however, she was pleased for European democracy and it showed there was a separation of powers between the parliament and governments in which MEPs were able to make their own decisions.
An MEP for South West England, who had criticised Mr Cardiff's nomination, has said that common sense prevailed.
UKIP MEP Marta Andreasen said: "I was not holding my breath about my colleagues rejecting Ireland's nominee for the European Court of Auditors. But I am glad that common sense ultimately prevailed.
"Mr Cardiff's reward for this blunder would have been a six-figure salary in an EU Institution tasked with ensuring the financial probity of the multi-billion euro EU budget. It would have been a farcical appointment."
Meanwhile, in a statement following the decision, Labour MEP Proinsias De Rossa said he had spoken to the Rapporteur of the Committee who informed him she would be recommending the acceptance of Mr Cardiff’s nomination.
Mr De Rossa said the Rapporteur’s report will go to the political groups for consideration by all members of the Parliament.
The MEP said there would be a final vote by the whole parliament in Strasbourg next month.
Kenny and Gilmore lobbied for Cardiff
It is understood that Taoiseach Enda Kenny and Tánaiste Eamon Gilmore had lobbied key political leaders in the European Parliament to help ensure Mr Cardiff's nomination was approved.
The Taoiseach spoke by phone to the leader of the centre right grouping in the parliament, the European People's Party, while Mr Gilmore is understood to have spoken to the head of the Party of European Socialists.
This evening, Mr Kenny said the Government had not had time to consider the committee's vote, and that it would consider it tomorrow.
Speaking to reporters at the IBEC conference in Dublin this morning, Finance Minister Michael Noonan said Mr Cardiff was the most qualified of all the people ever nominated by the Irish Government for this position.
Mr Cardiff's current job in the Department of Finance has already been advertised and the closing date for applications is tomorrow.
However, there may be some ambiguity in the advertisement.
It states: "Applications are sought for the post of Secretary General of the Department of Finance following the nomination of the current holder to a position in a European institution. The vacancy is expected to arise early in the New Year."
The advertised salary is €200,000, with a term of up to seven years.