The tie-up, announced to great fanfare in 2017, had been hailed as the birth of a much needed European industrial champion, an Airbus for the railways to face down a formidable Chinese rival.
But, after months of investigation and a rejected offer of concessions from the companies, the European Commission in a rare move knocked back the proposal.
"The Commission prohibited the merger because the companies were not willing to address our serious competition concerns," Vestager said in a statement.
"Without sufficient remedies, this merger would have resulted in higher prices for the signalling systems that keep passengers safe and for the next generations of very high-speed trains," she added.
The heavily expected veto has infuriated Paris, where ministers lobbied hard for the tie-up, seeing it as a necessary defence to compete against China's state-backed CRRC.
French Finance Minister Bruno Le Maire termed the refusal "an economic mistake."
Such a decision "will serve the interests of China," he told France 2 television.
Siemens chief executive Joe Kaeser blasted the decision as a sign the bloc "urgently needs structural reform."
"Europe urgently needs structural reform... protecting customer interests locally must not mean that Europe cannot be on a level playing field with leading nations like China, the United States and others," he said.
The red light by Brussels leaves a political scar on Vestager in the eyes of France and Germany after years of her being seen as an EU rising star.
Vestager was hailed as a European hero after taking on US tech giants Google, Facebook and Apple, which she ordered in 2016 to pay 13 billion euros ($14.8 billion) in back taxes.
She had been tipped to take an even more senior role in Brussels after elections in May, possibly as commission chief.
Brussels believes the alliance would crush smaller groups and hike prices for railways, with the merged firm in a commanding position for selling signalling equipment and high-speed trains.
Competition authorities in Britain, the Netherlands, Belgium and Spain have all firmly backed Vestager, afraid of increased costs for their national railways.
But backers of the tie-up wanted Vestager to look beyond Europe to the rise of CRRC, itself born of a merger of Chinese companies, before it is too late.
"Aren't there areas such as aviation, railways, banks where you have to take the global market as a reference rather than the European one?" pleaded German Economy Minister Peter Altmaier on Tuesday.
Caught in a political firestorm, commission head Jean-Claude Juncker defended the EU's competition policy on Tuesday, pointing a finger at those "who are saying that the commission is composed of blind, stupid, stubborn technocrats."
Juncker appeared to be hitting back at Kaeser, who last week complained that "backward-looking technocrats" would thwart a strategic tie up for Europe.
"We will never play politics or play favourites when it comes to ensuring a level playing field," Juncker said.
The merger proposal was to create a rail behemoth with operations in 60 countries and annual turnover of 15.6 billion euros ($17.8 billion).
Alone, CRRC's annual revenues of 26 billion euros ($29.6 billion) outweigh the three Western heavyweights Bombardier, Siemens and Alstom, each of which brings in around 8 billion a year.