Danny Crates, who carried the British flag at the Paralympic opening ceremony, will not defend his 800m title because of a calf injury.
Crates, 35, has been struggling all year but said last week he would "give it everything" to be on the start line.
"I'm totally devastated to have got so close," he said in a statement.
"I have always said I wanted to be competing for a medal and not just a participant, which is why I've pushed myself in training."
Tim Jones, the ParalympicsGB athletics team manager, said: "We are desperately disappointed for Danny.
"Whilst he has faced an uphill battle all year there had been some encouraging recent signs and we all believed he would reach the start line ready to not only compete, but in good shape to defend his Paralympic title.
"However, this latest setback has forced this decision. We have reluctantly had to admit defeat."
"I'd had a tough few months but I really thought I had turned the corner at the beginning of August"
Former rugby player Crates, who lost his arm in a road accident in Australia in 1994, was disappointed at finishing third at the 2000 Sydney Paralympics but took gold in Athens four years ago.
"I'd had a tough few months but I really thought I had turned the corner at the beginning of August," he explained.
"Unfortunately, despite some fantastic medical support, I suffered a recurrence of my injury problems in Macau and a further injury since arriving in Beijing."
Crates, who has been a member of the British team for 10 years, has dismissed suggestions he may walk away from athletics and hopes to bounce back - with London 2012 a possible target.
"I had no intention of retiring before the injury and I've no intention of retiring now," he added.
"I've always taken my athletics year by year while aiming towards the bigger picture.
"I'll go home, assess what has gone wrong, put it right and work towards my career and there's no reason that could not include 2012."
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