The BBC's Joshua Rozenberg: British citizenship is the one thing money can't buy

The 70-year-old Harrods owner called the decision "perverse" and said he would remain in the UK regardless.

"I'm here forever - I'm staying," he told reporters at Harrods in Knightsbridge, London.

"I know it's the establishment behind this. I live with my Egyptian passport which is the most fantastic civilisation and the most fantastic country in the world."

He said he would be seeking a judicial review of Mr Straw's "unjust and unfair" decision and lashed out at British politicians, calling them "zombies".

Jack Straw: Rejected bid

The Home Office said it had ignored a damning Department of Trade and Industry report into Mr al-Fayed's bitter battle with the late Tiny Rowland for control of Harrods "on grounds of passage of time".

But its statement added: "The home secretary has made this decision in light of the further information provided by Mr Mohamed al-Fayed following a further request on 11 March 1999."

Mr al-Fayed's spokesman Laurie Mayer said: "It's not a decision that a reasonable home secretary could have arrived at on the basis of the available facts.

"We also find it remarkable that only last night the prime minister, Tony Blair, and Home Secretary Jack Straw, saw fit to shake hands with Mr Fayed at a conference of the Muslim Council of Britain.

Mr Al Fayed's spokesman, Laurie Mayer: "We were told the safe-deposit box case would bear no relevance"

"Yet today they have decided he is not fit to be a British citizen."

But Mr Straw's decision was applauded by opposition Conservative MPs. Shadow Home Secretary Sir Norman Fowler said: "The home secretary has access to all the relevant facts and has come to the same judgment as his predecessor."

Mr al-Fayed's first application in 1995 was rejected by the then Conservative government.

Neil Hamilton: "Deport him"

Observers say his bid was probably severely hampered when he was implicated in paying Tory MPs to ask questions in Parliament. The resulting scandal damaged John Major's administration with "sleaze" allegations.

Former MP Neil Hamilton, who lost his seat at the 1997 election amid accusations he took cash from Mr al-Fayed, said the home secretary should now consider deporting the Harrods boss as an "undesirable alien".

The businessman responded that if it was not for his "courage to unmask the Conservative Party", Labour would not have won the last election.

Mr al-Fayed's application may also have been hamstrung by allegations that his staff broke into Mr Rowland's Harrods safe deposit box.

His hopes of having his application accepted were raised eight weeks ago when his brother, Ali, was successful in his own citizenship bid.