China was the only Security Council member to vote on Wednesday against the proposal spearheaded by France with British and US backing to at the al-Qaeda sanctions committee to declare him a global terrorist.
The move to sanction him picked up steam after the Pulwama suicide car bomb attack by JeM, which killed 40 Indian Security personnel.
Wednesday was the deadline for to take a decision and with Beijing's veto, the proposal will remain on hold.
In New Delhi, the External Affairs Ministry expressed disappointment over the outcome.
"This has prevented action by the international community to designate the leader of Jaish-e-Mohammed (JeM), a proscribed and active terrorist organization which has claimed responsibility for the terrorist attack in Jammu and Kashmir on 14 February 2019," the statement said.
"We will continue to pursue all available avenues to ensure that terrorist leaders who are involved in heinous attacks on our citizens are brought to justice," the statement said.
The US had said on Tuesday that China's opposition to designating Azhar as an international terrorist runs counter to the mutual goal with the US of regional stability.
As the founder and leader of JeM, Azhar "meets the criteria for designation by the United Nations" as a global terrorist subject to its sanctions, Department Deputy Spokesperson Robert Palladino said.
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