The stadium in Manhattan would be the centrepiece of the Games as well as the new home of the NFL's New York Jets.
But a three-man New York State Public Authorities Control Board has vetoed $300million in public funding - just a month before the host for 2012 is announced.
The board - whose vote must be unanimous - could reconsider the issue again later.
New York's mayor Michael Bloomberg had said: "If we don't have a stadium, we cannot get the Olympics."
The crushing verdict came 10 hours after the International Olympic Committee IOC issued a generally favourable evaluation of New York's chances to host the 2012 Games.
And Dan Doctoroff, founder of NYC2012 and deputy mayor of New York, said yesterday, following the IOC evaluation commission's report: “We have, as they (the IOC) pointed out, really one liability and that liability is thus far our inability to deliver a guaranteed done Olympic stadium.”
A spokesman for the New York bid team said the bid would not be withdrawn before the IOC vote.
Sheldon Silver and Joseph Bruno, two of three members of the New York state Public Authorities Control Board, abstained in the vote.
Silver was concerned the shops and offices that would be part of the project would hinder redevelopment efforts at the nearby site of the World Trade Center terrorist attacks, an area Silver represents.
The Jets’ winning bid for the property included $440million dollars from six developers and a pledge from the National Football League to stage the 2010 Super Bowl there.
