The environmental campaign group had spoken out in favour of the proposed zero carbon development at Dunsfold Park at an inquiry earlier this year.
But communities secretary John Denham last week rejected developer Dunsfold Park Ltd's scheme, despite its "high overall level of sustainability and low-carbon lifestyle" and its offer of 911 affordable homes to meet the severe local shortage.
The considerable amount of road traffic it would generate would have a "severe and unacceptable impact on an overstretched local road network", he concluded.
He added that the proposal for new housing pre-empts the consideration of alternative sites through the local development framework.
Friends of the Earth said the decision showed that the Planning Inspectorate has not grasped the urgency of tackling climate change.
Waverley Borough Council principal planning officer Paul Falconer noted the sustainability credentials of the scheme, but said these could not resolve the issue of an unsustainable location. The plans cannot press ahead of its core strategy, he added.
The council is consulting on policy options and does not envisage submitting its plan to the government until November next year. A housing needs survey estimates that more than 500 extra affordable homes are needed each year for the period from 2008 to 2013.