A Department of Justice panel said evidence from prosecutors against Pfc Joseph Scott Pemberton showed that he killed Jennifer Laude after picking her up in a bar in Olongapo city in October.
Police said Laude, formerly known as Jeffrey, was found dead with her head inside a toilet bowl in a hotel minutes after Pemberton left the room.
The case has refueled opposition to a military agreement between Manila and Washington that allows US custody over American service members accused of crimes in the Philippines.
US Ambassador Philip Goldberg has said Washington is "sensitive" to Filipino sentiments over the killing and agreed to have Pemberton detained inside a Philippine military camp in Manila but under US guard.
Pemberton's lawyers argued in the appeal that there was no direct evidence that he killed Laude, but the panel said prosecutors can utilize circumstantial evidence to prove their case.
"If direct evidence is insisted upon under all circumstances, the guilt of vicious felons who committed heinous crimes in secret or in secluded places will be hard, if not impossible, to prove," it said.
It cited testimony of a fellow Marine to investigators that Pemberton had told him, "I think I killed a he/she."
Benjamin Tolosa Jr, a lawyer for Pemberton, said the defense can ask the Justice Department to reconsider its decision. If that is also denied, they have the option of going to the Court of Appeals, he said.
