He was poised to become the first Roman Catholic bishop in the Upper House since the Reformation, as part of a drive by the Prime Minister to appoint senior leaders of all the main faiths to sit alongside Church of England bishops.
Privately, Gordon Brown had told the cardinal that he was keen for him to provide leadership in the Lords once he had secured backing from the Catholic Church.
But the former Archbishop of Westminster has now rejected the offer of a life peerage following disagreements among Catholics.
He told this newspaper that he declined the honour after consulting with the Vatican. In secret meetings of senior clerics held to canvass opinion, concerns had been expressed over the implications of the cardinal accepting the offer.
While the cardinal says that the final decision rested with him, there was strong opposition to the proposal from Catholic bishops in England and Wales.
Some of the bishops who were consulted were against the move on the grounds that it could compromise the Church's freedom to be an impartial and critical voice.
Others argued that canon law forbids clergy from taking any office that might involve the exercise of political power.
The Church of England has 26 lords spiritual. Dr Jonathan Sacks, the Chief Rabbi, was ennobled earlier this year, and there have been reports that Muhammad Abdul Bari, the head of the Muslim Council of Britain.
The cardinal's refusal of a peerage is a setback to Mr Brown's attempt to make the Lords chamber more representative of the nation's religious diversity.
The Rt Rev John Arnold, an auxiliary bishop in Westminster and respected canon lawyer, said: "Jonathan Sacks is there but Catholics won't be there because there is a canon in the code of canon law that says ordained clerics should not take part in any legislative forum in Government."
There was disagreement over whether the law was applicable, but had it been deemed so, a special dispensation from Pope Benedict XVI would have been needed to allow the cardinal to enter the Lords.
Some senior clerics urged the former archbishop to accept a Lords seat, arguing that there was a need for a stronger Catholic voice in Parliament on issues such as euthanasia, gay adoption, church schools and abortion.
The Prime Minister had publicly praised Cardinal Murphy-O'Connor in February and signalled that a seat in the upper chamber was likely.
"He is widely respected across the world for his interest in international development," he said in an interview with The Tablet, the Catholic weekly.
"He has shown great leadership on those issues, such as world poverty, where people look to the Church for leadership.
"I think he has shown great integrity right throughout the period in which he has been Cardinal and that has earned the respect of people far beyond the Catholic Church and right across the country."
However, the subject was later quietly dropped following the disagreements within the Catholic Church over the potentially historic move.
Last night, the cardinal said: "I did consult widely with Bishops, the Holy See and member of the House of Lords. Ultimately it was my decision to turn down the kind invitation of the Prime Minister, Gordon Brown.
"Since my retirement as Archbishop of Westminster I have been asked by Pope Benedict XVI to join two important and busy Congregations [to choose Bishops across the world]. I have gladly accepted this honour as the best way of continuing to serve the Church."
Cardinal Murphy-O'Connor became the first Archbishop of Westminster since the Reformation to retire rather than die in office. He has been appointed to the Congregation for Bishops, which is one of the most influential in the Vatican.
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