The Council of State on Monday ruled against the Dignitatis Humanae Institute (DHI), which Bannon backs, and which wanted to start the school in an 800-year-old monastery south of Rome.
The case has been in the Italian court system for years, with suits and countersuits between the DHI on one side and the culture ministry, which owns the property, and a group of local environmental and civic organisations on the other.
Bannon, a Catholic, was helping to craft the curriculum for leadership courses aimed at rightwing Catholic activists at what was to be the Academy for the Judeo-Christian West in the town of Trisulti.
Many residents opposed the school and in 2019, the ministry withdrew a 19-year lease, citing violations of contractual obligations. The institute appealed to the regional tribunal saying the move was politically motivated and won the appeal last year.
The institute's founder, Benjamin Harnwell, confirmed Monday's decision against the DHI in a telephone call with Reuters but said he had no immediate further comment. He said lawyers were still studying the ruling.
During the administration of the US president Donald Trump, the project for the institute found support among Italy's populist rightwing politicians, such as former interior minister Matteo Salvini.
Steve Bannon "told Italy's populist leader: Pope Francis is the enemy' Read more Over the years the project lost support of key Roman Catholic conservatives, including American Cardinal Raymond Burke, who for years strongly backed Bannon and was a honorary president of the institute.
Burke withdrew his support after Bannon said he wanted to make a film from a book alleging homosexuality in the Vatican.
Days before leaving office in January, Trump granted clemency to Bannon, who was a key adviser in Trump's 2016 presidential run.
Bannon was charged last year with swindling the president's own supporters over an effort to raise private funds to build the president's wall on the US-Mexico border. He pleaded not guilty.
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