"The government has today rejected Biljana Plavsic's pardon request," it said in a brief statement.
A justice ministry spokeswoman told AFP the government would not disclose the reasons for its decision.
The International Criminal Tribunal for the former Yugoslavia (ICTY) in The Hague sentenced Plavsic, now 78, in February 2003 for crimes against humanity during the country's 1992-95 war, which claimed more than 100,000 lives.
The self-styled Bosnian Serb "Iron Lady" is the highest ranking official of the former Yugoslavia to have acknowledged responsibility for the atrocities committed in the Balkan wars.
Sweden agreed to house Plavsic in one of its prisons in response to a request from the tribunal. She was transferred in June 2003 and is an inmate at the Hinseberg women's prison.
Plavsic had requested an early release based on her advancing age, failing health and poor prison conditions.
Swedish news agency TT said a recent psychiatric evaluation had shown that she was in poor health and that she has had a hard time adapting to life behind bars.
She is also significantly older than the other inmates "and has reportedly received threats," the agency said.
A member of Bosnia's tripartite presidency in September urged Sweden not to pardon Plavsic.
Given the gravity of her crimes, "any act of mercy would be big mistake and an insult to the victims and families of the victims," Zeljko Komsic, a Bosnian Croat, said in a letter to the Swedish government.
"One should especially bear in mind that some 60,000 people of Bosnian origin now live in Sweden, most of whom were forced to leave their homeland because of (Plavsic's) engagement in the war," Komsic said.
Sweden's government denied Plavsic's first pardon request in April 2007.