The proposal was voted down Wednesday by delegates to the Convention on International Trade in Endangered Species being held in Bangkok.
Representatives of the United States and Russia supported placing polar bear hides, heads or other parts in the same category as elephant ivory, forbidding their cross-border sale.
However, Canada, the European Union and Norway opposed the move.
Sheryl Fink of the Canadian arm of the International Fund for Animal Welfare says an opportunity to protect Canada's polar bears "has been squandered."
She says the decision should not be seen as an implication that polar bears are out of danger and says her group is calling on the Canadian government to take "every possible measure available to protect this iconic species."
Canada has long maintained that bear populations are healthy and remain at between 20,000 and 25,000, and that the real threat to the bears is climate change, not international trade.
They say restricting commerce wouldn't reduce the number of bears killed because a ban wouldn't affect traditional or sport hunts.
Environment Canada officials have said Inuit hunters have developed a growing and lucrative business in selling polar bear skins as a byproduct of their traditional hunt.
But animal welfare groups and supporters of the proposal say the polar bear numbers are not as healthy as Canadian officials suggest.
"The world once again had a chance to take action to safeguard polar bear populations and failed," said Jeff Flocken, North American regional director of IFAW.
"Polar bears were handed the same appalling fate at the last CITES meeting and the decision is even more disheartening this time around. Each passing year that this iconic species is not protected to the fullest, is another year closer to losing the polar bear forever."
Russian scientist Nikita Ovsyanikov said polar bear populations are decreasing and the species is threatened when the bears are hunted and killed for their fur and parts.
"The polar bear is facing a grim future, and today brought more bad news," said Dan Ashe, director of the U.S. Fish and Wildlife Service.
"The continued harvest of polar bears to supply the commercial international trade is not sustainable. Members of CITES have an obligation to protect species from this threat. Today, we failed to do that for the polar bear."