The Mayor of Liverpool Joe Anderson has condemned the decision despite it being recommended for approval by an independent Planning Inspector.
Under the plans, 271 damp and run down homes were to have been demolished and replaced by 154 new houses. Another 37 terraced properties would have been refurbished.
Liverpool council has been informed that the Secretary of State has overruled planning inspector Christine Thornby's decision that it should be given the go-ahead.
Mayor Anderson said: "This is yet another kick in the teeth for the long-suffering residents of the Welsh Streets, who have now been waiting more than a decade for new homes.
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"I was prepared to abide by the decision of an independent inspector even if it had gone against us, but it is unacceptable, dishonourable and completely perverse for Eric Pickles to continue to ignore local leadership, local people and then hold and pay for an independent Public Inquiry using taxpayers money, which he then ignores for naked political posturing.
"Yet again, this Government talks about localism but then interferes in the wishes of local people. It is absolutely appalling and smacks of the very worst type of political interference from Whitehall.
"This scheme was carefully developed and supported by the vast majority of local people in a thorough and detailed consultation.
"The residents of the Welsh Streets have already waited far too long for regeneration. They have shown real determination, resilience and fantastic community spirit, to fight for modern, family homes.
"I would like to reassure them that we stand shoulder to shoulder with them in finding a way through this to deliver the new homes that they long for, and deserve.
"We will be looking straight away at how we can challenge this dreadful decision."
(CD/IT)
