The ultra-Orthodox party said in a statement that Shas had demanded real aid for the disadvantaged population and sought to protect Jerusalem, but was turned down.
Despite the announcement, senior Kadima officials continued to work behind the scenes Friday in order to sway the party into agreeing to join the coalition after all.
In the early hours of the afternoon, the officials conducted massive amounts of phone calls to Shas representatives in order to try and build a base for renewed negotiations.
In a press conference held Friday afternoon, Shas Chairman Eli Yishai said his party's decision was final.
Addressing Shas' demands in terms of the child allowances and Jerusalem, he said they were not personal but rather in favor of the entire public.
"We made our decision according to our principles. Shas cannot be bought. We stick to our goals and principles."
As for the Jerusalem issue, he noted that "a year ago Shas decided that it would leave the government is talks are held on Jerusalem's status, all the more so when it comes to joining a government which will not commit not to discuss Jerusalem. Jerusalem is not for sale."
Sources close to the foreign minister said that she was prepared to pay some prices in order to form a government, but that a coalition would not be built at any price.
Shas' spiritual leader, Rabbi Ovadia Yosef, was presented Friday morning with the understandings reached between the Shas and Kadima negotiation teams. In a telephone survey, the Council of Torah Sages' members voted against joining the government.
"Throughout the entire coalition negotiations, Shas did not ask for treats, titles or any political upgrade," the statement read.
"Shas asked for real aid for the Israeli society's disadvantaged population and sought to protect Jerusalem. We cannot ignore the difficulties and hardship these days, when Israel has reached the first place in poverty among the developed countries."
'Israel will be viewed as a serial conceder'
The statement went on to say that "Shas stressed throughout the talks that if Jerusalem's status is not strengthened and if it is not made clear that the Israeli capital is not cash, this will have an effect on any future dialogue and will present Israel as a country which fails under diplomatic pressure and as a serial conceder."
Shas officials stressed that the party's negotiating team presented solutions for both issues, but that these proposals were rejected, leading the party to decide not to join the government.
Livni's offer of NIS 650 million (about $172 million) for the child allowances was rejected Wednesday. Shas officials said that the party was interested in a minimum sum of NIS 1 billion ($265 million) for this purpose.
The foreign minister set a deadline during Thursday's Kadima faction meeting, saying that a decision will be made by Sunday on whether to form a new government or call for general elections.
"I informed the president that I will be coming to him on Sunday and we'll decided between elections and a government. If we go to elections, we'll win," she said.