The split ruling is the second time a major initiative spearheaded by the President has been blocked, just seven months before he leaves office.
Barack Obama unveiled his plan to allow around 4 million illegal immigrants to live and work in the US without fear of deportation in late 2014.
It sparked the ire of opposition Republicans, who argued the President was going beyond his powers and bypassing the US Congress.
Now, Supreme Court justices have failed to reach a consensus on the issue, resulting in an evenly split ruling and stopping the move.
It means a lower court ruling in 2015 blocking previous executive action brought by Mr Obama but never enacted is still in place.
Speaking after the judgment was handed down, the President was clearly frustrated.
"One of the reasons why America is such a diverse and inclusive nation is because we're a nation of immigrants. It has shaped our character, and it has made us stronger. But for more than two decades now, our immigration system, everybody acknowledges, has been broken. And the fact the Supreme Court wasn't able to issue a decision today doesn't just set the system back even further, it takes us further from the country that we aspire to be."
The measure would have allowed access to a work permits program for millions who live in the country, have no criminal record and have children who are citizens or legal permanent residents.
The 4-4 split was only possible because the Republican-led Senate has refused to endorse Mr Obama's nominee for the Supreme Court bench, leaving it with eight serving justices.
The President lamented the missed opportunity.
"This is part of the consequence of the Republican failure so far to give a fair hearing to Mr Merrick Garland, my nominee to the Supreme Court. It means that the expanded set of common sense deferred-action policies, the ones that I announced two years ago, can't go forward at this stage, until there is a ninth justice on the court to break the tie. They are allowing partisan politics to jeopardise something as fundamental as the impartiality and integrity of our justice system, and America should not let it stand."
Immigration has been a heated topic in the lead up to November's presidential election.
In a statement, presumptive Republican nominee and billionaire businessman Donald Trump has praised the decision, calling the initiative unconstitutional.
But demonstrators blocked a road outside the US Immigration and Customs office in the state of Arizona in protest.
At a nationwide meeting of Latino leaders, National Association of Latino Elected and Appointed Officials executive director Arturo Vargas expressed concern for the future of millions of families.
"The only reaction to have is disappointment that millions of lives are being affected by this decision of not allowing families, one, to come out of the shadows, and, number two, to assure that they're going to be able to stay together, and that's something that really goes to the heart of what this decision means, that people now are going to continue to live in fear, even though they have been law-abiding citizens here contributing to the economy, and now have their lives in limbo."
Others, like US Secretary of Labor Tom Perez, promised to keep pushing for change.
"When I see what I saw today, it certainly and undeniably breaks my heart. But I will tell you this: It will never break my spirit, nor should it ever break your spirit. And it only strengthens my resolve to fight for fairness, and it only strengthens my resolve, and our resolve, to fight for comprehensive immigration reform."
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