Environment Minister Sammy Wilson has blocked plans by the developers of Bridgewater Park to build a 130,000 sq ft unit which would have been used as a Tesco Extra store.
The news has been welcomed by town centre traders who were bitterly opposed to the Tesco plan fearing if it went ahead Banbridge would turn into a 'ghost town'.
Boss of the Northern Ireland Independent Retail Trade Association, Glyn Roberts said the decision was a victory for common sense.
"The Minister for Environment deserves considerable credit for supporting local retailers in Banbridge by rejecting the Tesco application," he said.
"Our campaign was an uphill struggle as the Tesco application was initially supported by the local council and we are delighted that our lobbying has been successful.
"While this is a great result for our members in Banbridge, we still have a long road ahead of us. The multiples have applications pending in Crumlin, Ballyclare and Larne which could cause significant damage to independent retailers in those towns.
"The DOE Minister should immediately publish PPS5, which would effectively promote town centre investment first rather than unsustainable out of town development by the multiples."
Traders Association spokesperson Joe Quail said he was delighted at the news.
"This is terrific news and will be warmly welcomed not just by local traders in Banbridge but throughout many in the local community who objected to this application," said Mr Quail.
"If this application had been successful then our town would have been ruined with the loss of hundreds of jobs and the closure of many local independent retailers in the town centre who would have been unable to compete with such a vast store.
"We already have a big Tesco store in the town which can more than accommodate those who wish to shop with them," he added.
"Traders in Banbridge want to work with our Council and the NI Executive to ensure that our town can grow and prosper in the future."