The terms of the Scottish Office announcement suggested that the proposal to merge Glasgow College of Building and Printing and Glasgow College of Food Technology was flawed, but that mergers were still very much on the agenda.
A joint statement by the two colleges expressed official disappointment although one insider characterised the decision as "no, but . . ."
The Education Minister, made it clear that the proposal failed to take sufficient account of the impact on other colleges. But Brian Wilson said: "My door remains wide open to merger proposals."
Principals had expressed alarm that a large FE college, which would have had 700 staff and 10,000 students, could have become a "predatory institution" expanding at the expense of the other eight Glasgow colleges.
Tom Wilson, principal of the College of Building and Printing, denied the predator charge which was levelled by Ian Graham, of John Wheatley College. "We are not threatening other people," he told The TES Scotland last August.
The city council backed the merger but, in common with other opponents, called for a rethink on the proposed name of the new institution - City of Glasgow College. This fuelled suspicions that the two colleges were intent on deserting their specialist mission to move into other curricular areas.
Mr Wilson shared this view. The Scottish Office letter to the colleges acknowledges that the merger, which would have been the first since incorporation in 1993, offered the prospect of "wider learning opportunities" and financial savings. But it says Mr Wilson is concerned that these wider opportunities would force the merged college to introduce courses that already existed in other Glasgow colleges.
"The merged college would undoubtedly wish to attract students to undertake these courses which would be of common interest to students studying courses currently on offer at either of your colleges and this would be likely to lead to unwelcome duplication."
Mr Wilson said his priority in considering merger proposals was the big picture not just the narrow interests of individual colleges. "I agree that rationalisation of provision in Glasgow is desirable and I do not wish the momentum of recent discussions to be lost. In the right circumstances, mergers can deliver real benefits both for colleges and for students, and can secure a more financially robust further education sector.
"Accordingly I should be pleased to consider future merger proposals which present a strong case with clear benefits for the proposers and for the improvement of further education provision in the locality."
The joint statement from the two colleges interpreted Mr Wilson's decision as a holding position pending the development of a new strategic framework for FE. Details are also expected shortly of the formation of an FE funding council.
The statement said: "We fully intend to continue to consider ways of further collaboration."
The way in which FE colleges are currently funded acts as a disincentive to merger because each receives a fixed sum of pound;250,000 irrespective of size, as a recognition of costs all colleges have to bear. Two colleges remaining apart would be entitled to pound;500,000.
The Scottish Office, which has just finished its consultation on the future funding of colleges, has proposed that the fixed element should be phased out. But this would take several years to complete, and the Association of Scottish Colleges is opposed to what it sees as precipitate changes until the implications for individual colleges are clearer.
Ironically, the Scottish Office has expanded rather than contracted the FE sector since Labour came to power. Mr Wilson has approved a pound;7 million FE centre in Kilwinning, North Ayrshire, which would be an extension of James Watt College in Greenock.