Tanni Grey-Thompson was offered Sport England role but appointment was vetoed by Number 10
Instead, the Government announced that Nick Bitel, the London Marathon chief executive and a member of the Sport England board since 2010, had been appointed to the role, with the key task of increasing grassroots sports participation to cement the country's Olympic legacy.
Although Bitel is a highly respected sports administrator and legal brain, the Government's decision to veto Grey-Thompson will be seen by many as payback for her outspoken criticisms of the Coalition's welfare reforms.
Grey-Thompson sits in the House of Lords as an independent cross-bencher, but she has been a vocal opponent of the Government's policies on disability benefits.
It is claimed that a number of Tory peers sought private meetings with David Cameron to voice their concerns that she was too "political" to run the country's largest sports quango and that her appointment should be blocked.
According to sources, the 43-year-old peer was offered the Sport England chairmanship by Robertson 12 days ago but was later informed that her appointment still had to be signed off by the Prime Minister.
Robertson, who is understood to have been a big supporter of Grey-Thompson's candidacy, had to break the news to her on Monday that her selection had been overturned.
Grey-Thompson admitted last night that she was "very disappointed" by the decision but would not comment on the selection process.
"First and foremost, I would like to send my congratulations to Nick Bitel," she said. "My aim has always been to try to ensure the best for sport in the UK and to secure the grassroots legacy of London 2012 and in going for the position at Sport England it was my hope that I could continue that work.
"We need strong leadership on this issue to make sure it doesn't slip down the agenda. I do, of course, respect the Government's decision, and having worked with Nick Bitel on the board of the London Marathon and LLDC [London Legacy Development Corporation] I have no doubt that he will do a fantastic job. Needless to say, I will continue to offer any support I can to Sport England and those other organisations that make sport more accessible in our society.
"It is a great privilege to sit as an independent cross-bench peer in the House of Lords and I will continue to give my backing to whichever measures I believe are for the good of sport and wider society in the UK."
It is understood that Grey-Thompson, who won 11 Paralympic gold medals as a wheelchair racer, and Bitel were both put forward as potential candidates for the Sport England role by a selection panel headed by Sir Keith Mills, the vice-chairman of the London 2012 Games.
Lord Coe, the chairman of London 2012 and now chairman of the British Olympic Association, gave his backing to Grey-Thompson, describing her as "an ideal candidate".
But it became apparent in recent days that the Government was having second thoughts, with Whitehall sources briefing about Grey-Thompson's lack of experience in the commercial sector compared to Bitel, whose leadership of the multi-million pound London Marathon since 1995 made him better equipped to handle the £300 million annual Sport England budget.
Bitel was one of two appointments announced yesterday with Rod Carr, the former performance director of the Royal Yachting Association, being named as the new chairman of UK Sport, in succession to Baroness Campbell.
UK Sport distributes Lottery and Exchequer funding to elite sports and Carr will be responsible for maintaining the momentum of the GB Olympic and Paralympic teams following the success of London 2012.