The Nepalese Embassy in India initially granted approval for Kunzig Shamar Rinpoche's body to be transported to Nepal from neighbouring India for cremation after he died of a heart attack in Germany last month.
Rinpoche, 62, was the 14th Shamarpa of the Karma Kagyupa lineage, also known as the Red Hat Lama of Tibet, and one of the most senior figures in Tibetan Buddhism with followers in Asia and Europe.
"Nepal does not have laws regarding cremation of foreigners and thus we cannot allow his body to be brought here," Laxmi Prasad Dhakal, spokesman for Nepal's home ministry told AFP.
"The decision was not made under pressure. We haven't received any request from any country regarding this issue," he added.
Nepal, home to around 20,000 Tibetans, is under intense pressure from its neighbour China over the exiles who have fled their homeland.
The government in Kathmandu has said it will not tolerate what it calls "anti-China activities" and has grown increasingly intolerant of protests highlighting human rights violations in Tibet.
The body had been due to be brought from India to the Shar Minub Institute in Kathmandu, a monastery the Shamarpa had built.
"It was his wish to be cremated in Nepal because of the historical connection between Nepal and the Shamarpas," said Neeraj KC from the Administration of the Shamarpa.
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