Sensitive surveillance techniques must be protected, the government says
The use of intercept evidence in courts in England and Wales is not "legally viable", the Home Office has said.
A series of mock trials showed that using e-mails and phone taps was not compatible with strict rules around the disclosure of evidence to the defence.
Storing such material would also be too difficult and costly, the trials found.
The home secretary said "no responsible government could proceed on this basis", while police chiefs said the difficulties were "insurmountable".
Under current UK law, material from intercepted e-mails or phone calls can be used only for intelligence purposes, but a possible method by which it could be used in court was devised in a Privy Council review.
Under the model, the prosecution did not have to store, transcribe and disclose all intercepted material to the defence, but independent lawyers said this was not compatible with the suspect's human rights.
The alternative would be to store all of the material for the full duration of the inquiry, but officials concluded this would mean "electronic warehouses full of documents" and would cost billions of pounds.
Sir Geoffrey Grigson, a former judge who took part in the mock trials, said allowing the material could also have serious operational implications.
"With intercept, that will almost certainly require disclosure to the defence of information regarding techniques used by agencies and their capacities," he said.
Danny Shaw, BBC News home affairs correspondent
Picture the scene: an MI5 investigator is listening to a terrorism suspect's phone calls. They've been intercepted for months, along with e-mails and texts, as part of a complex, global inquiry.
The investigator makes rough notes, only transcribing comments that appear significant - it's valuable intelligence that helps steer the investigation.
Now imagine a different scene: an MI5 investigator is monitoring calls and e-mails, aware they may be used as evidence in a criminal trial and requested by the defence under disclosure rules.
Hundreds of calls have to be transcribed (in some cases translated), stored and indexed.
Multiply this scenario by 1,700 - the number of interception warrants authorised last year - and officials say costs would run into "billions" of pounds. Police and security officials don't believe it's worth it.
Unless a simpler, cheaper model can be devised intercept evidence is unlikely ever to be used in British courts.
"Disclosure of such material would cause serious damage to the intelligence processes."
Home Secretary Alan Johnson said it was "disappointing" that the trials had failed, but "no responsible government could proceed with implementation on this basis".
"Because of the additional demand on resources to make intercept as evidence admissible in court, this model could jeopardise national security and damage our ability to bring terrorists and other serious criminals to justice," he said.
Mr Johnson added that efforts would resume next year to try to make the system workable.
Deputy Assistant Commissioner Janet Williams, speaking on behalf of the Association of Chief Police Officers, said the difficulties were "insurmountable".
But a senior Whitehall official told the BBC he was not as pessimistic and that Thursday's conclusion did not spell the "death knell" for intercept evidence.
Critics argue that intercept evidence is regularly used in many other countries, but the government's independent reviewer of terrorism legislation, Lord Carlile, said that their legal systems were much less "demanding".
"That means that it can be entirely unknown to the suspect that intercepts have been examined and used on an evidential basis," the peer said.
"That could not happen here because we have the highest standards of disclosure in the world."
But criminal barrister Matthew Ryder told the BBC the decision was "surprising and disappointing".
"The conclusion is that our criminal justice system can't accommodate what will often be the very best evidence in the case," he said.
"The implications for our system are serious - they could mean that cases which should be prosecuted aren't being prosecuted."
Mr Ryder agreed with Shami Chakrabarti, director of human rights organisation Liberty, that sufficient safeguards were already in place to protect crucial details of investigative techniques.
She said: "Clearly, sometimes you do have to protect sensitive material. We have a very well developed system of public interest immunity - we protect informants that way and other technologies that way - and that could all apply in this case."
Ms Chakrabarti said it was "a very sad day" for justice and branded it "nonsense" that a conversation recorded by a hidden bug could be used in court, but an intercepted telephone call could not be.