The bill would have provided free health care and compensation payments to 9/11 rescue and recovery workers who fell ill after working in the trade center ruins.
It failed to win the needed two-thirds majority, 255-159. The vote was largely along party lines, with 12 Republicans joining Democrats supporting the measure.
For weeks, a judge and teams of lawyers have been urging 10,000 former ground zero workers to sign on to a court-supervised settlement that would split $713 million among people who developed respiratory problems and other illnesses after inhaling trade center ash.
The court deal shares some similarities with the aid program that the federal legislation would have created, but it involves far less money. Only the most seriously ill of the thousands of police officers, firefighters and construction workers suing New York City over their exposure to the dust would be eligible for a hefty payout.
But supporters of the deal have been saying the court settlement is the only realistic option for the sick, because Congress will never act.
"Ladies and gentlemen, you can wait and wait and wait for that legislation ... it's not passing," Kenneth Feinberg, the former special master of the federal 9/11 victim compensation fund, told an audience of ground zero responders Monday in a meeting on Staten Island.
Democratic leaders opted to consider the House bill under a procedure that requires a two-thirds vote for approval rather than a simple majority. Such a move blocked potential GOP amendments to the measure.
A key backer of the bill, U.S. Rep. Peter King, a Long Island Republican, accused Democrats of staging a "charade."
King said Democrats were "petrified" about casting votes as the fall elections near on controversial amendments, possibly including one that could ban the bill from covering illegal immigrants who were sickened by trade center dust.
If Democrats brought it to the floor as a regular bill, King said, it would have passed with majority support.
GOP critics branded the bill as yet another big-government "massive new entitlement program" that would have increased taxes and possibly kill jobs.
To pay the bill's estimated $7.4 billion cost over 10 years, the legislation would have prevented foreign multinational corporations incorporated in tax haven countries from avoiding tax on income earned in the U.S.
Bill supporters said that would close a tax loophole. Republicans branded it a corporate tax increase.
New York City Mayor Michael Bloomberg called the vote an "outrage." He said it was clearly a tactic designed to stall the bill.
"This is a way to avoid having to make a tough decision," Bloomberg said, adding that the nation owes more to "the people who worked down at 9/11 whose health has fallen apart because they did what America wanted them to do."
John Feal, a ground zero demolition worker who has lobbied extensively for the legislation, expressed disgust.
"They pulled the rug out from beneath our feet," Feal said. "Whatever member of Congress vote against this bill, whether Republican or Democrat, should go to jail for manslaughter."
The bill would have provided up to $3.2 billion to cover the medical treatment of people sickened by trade center dust and an additional $4.2 billion for a new fund that would have compensated them for their suffering and lost wages.
The potential promise of a substantial payout from the federal government had caused some ground zero workers to balk at participating in the proposed legal settlement, which would resolve as many as 10,000 lawsuits against the city.
Initially, the bill would have prohibited people from participating in the new federal compensation program if they had already been compensated for their injuries through a lawsuit, but a change was made in recent days eliminating that restriction.
Nevertheless, with the House rejecting the bill and no vote scheduled on a similar Senate version, it appears almost guaranteed that there will be no new federal law by Sept. 8, the date by which ground zero workers involved in the lawsuits must decide whether to accept the settlement offer.
Under the terms of the deal, 95 percent of those workers must say yes for the court settlement to take effect.
The compensation system set up by the court would make payments ranging from $3,250 for people who aren't sick but worry they could fall ill in the future to as much as $1.5 million to the families of people who have died. Nonsmokers disabled by severe asthma might get between $800,000 and $1 million.
About 25 percent of the money would go to pay legal fees. Contested claims would be heard by Feinberg, who would act as an appeals officer.
Researchers have found that thousands of New Yorkers exposed to trade center dust are now suffering from breathing difficulties similar to asthma. Many have also complained of heartburn or acid reflux, and studies have shown that firefighters who worked on the debris pile suffer from elevated levels of sarcoidosis, an inflammatory disease.
Many of the workers also fear that the dust is giving people cancer, although scientific studies have failed to find evidence of such a link.
The exact number of sick is unclear. Nearly 15,900 people received treatment last year through medical programs set up to treat Sept. 11-related illnesses, but doctors say many of those people suffered from conditions that are common in the general public.
The House bill is named for James Zadroga, a police detective who died at age 34. His supporters say he died from respiratory disease contracted at ground zero, but New York City's medical examiner said Zadroga's lung condition was caused by prescription drug abuse.
Caruso reported from New York.