The proposed dual carriageway would have gone through the Blackdown Hills area of outstanding natural beauty. Instead, the government will upgrade the A358 from near Ilminster to the M5 at Taunton, which it claims will save around £90 million.
Groups including Friends of the Earth (FoE), Transport 2000 and the Campaign to Protect Rural England (CPRE) argued that widening the A303 is unacceptable on environmental grounds. Parts of two sites of special scientific interest would have been destroyed and surrounding countryside and rivers affected.
CPRE head of transport policy Paul Hamblin said: "This is the first major test of government transport policy since it published its white paper.
It is reassuring to see it uphold its commitment to protect sensitive sites from road building."
Transport 2000 spokesman Steve Hounsham also welcomed the announcement.
He added that the government has "clawed back some of its environmental credentials".
However, FoE pointed out that £670 million has been earmarked for this project while the Exeter to Waterloo rail line receives nothing and regional rural bus services are being cut. Lobby groups now hope that the government will apply the same environmental standards to other schemes in the pipeline.
But Stephen Grant, chairman of the CBI in the South West, accused the government of turning its back on the local economy. "Proposed improvement to the A358 is welcome, but this will not remove the need for the east-west road link," he maintained.
The South West Regional Assembly said that it is disappointed that the A303 plans have been rejected because the option is supported by the majority of its members.