The CMA said the deal would lead to increased prices in stores, online and at many petrol stations across the UK.
Stuart McIntosh, chair of the CMA inquiry group, said: "It's our responsibility to protect the millions of people who shop at Sainsbury's and Asda every week.
"Following our in-depth investigation, we have found this deal would lead to increased prices, reduced quality and choice of products, or a poorer shopping experience for all of their UK shoppers.
"We have concluded that there is no effective way of addressing our concerns, other than to block the merger."
The CMA said shoppers and motorists would be "worse off" if Sainsbury's and Asda - two of the country's largest supermarkets - were to merge. This is due to expected price rises, reductions in the quality and range of products available, or a poorer overall shopping experience.
The watchdog added that the deal would result in a "substantial lessening of competition" at both a national and local level for people shopping in supermarkets. This would mean shoppers right across the UK would be affected, not just in the areas where Sainsbury's and Asda stores overlap.
Roger Burnley, CEO of Asda, said: “Asda’s DNA is delivering low prices for hard working families and that will never change.
"We were right to explore the potential merger with Sainsbury’s, which would have delivered great benefits for customers and supported the long term, sustainable success of our business. We’re disappointed with their findings but will continue to find ways to put money back into customers’ pockets and deliver great quality and service in an ever changing and demanding market.
"I have always been hugely aware that the last year has been an unsettling time for all of our colleagues and am immensely grateful for their commitment and dedication during that time. Our focus is now on the most important job we all have – delivering for our customers.”
Sainsbury's CEO Mike Coupe said: "The specific reason for wanting to merge was to lower prices for customers.
"The CMA's conclusion that we would increase prices post-merger ignores the dynamic and highly competitive nature of the UK grocery market. The CMA is today effectively taking £1bn out of customers' pockets.
"Sainsbury's is a great business and I am confident in our strategy. We are focused on offering our customers great quality, value and service and making shopping with us as convenient as possible."