The government's decision, taken on March 24, was conveyed to the court by Advocate General P S Raman.
The Prison Advisory Board, constituted by the government to consider Nalini's representation, has rejected her plea on eight grounds and the state government has accepted it, Raman told a division bench of the court.
The bench comprising Justices Elipe Dharma Rao and K K Sashidaran was hearing a petition by Janata Party President Subramanian Swamy challenging a September 2008 order by a single judge directing the state government to constitute the advisory board to consider the release of Nalini, who is in prison for the last 19 years.
The court on March 11 last asked the state government to take a decision within two weeks on her plea after the AG submitted that the the PAB's report was being examined.
Nalini was sentenced to death by a special court along with 25 others in January 1998 and the Supreme Court had confirmed the capital punishment for her and three others.
However, her death penalty was commuted to life by the state government on April 24, 2000 allowing a clemency petition. Congress President Sonia Gandhi had favoured reduction of her punishment considering the plight of Nalini's young daughter.
An earlier plea by Nalini for premature release was rejected by authorities in October 2007.
Maintaining that Nalini "participated fully" in the Rajiv Gandhi's killing, Swamy said outside the court that the commutation of her sentence was "wrong".
"Rajiv Gadhi was the prime minister of India. Our prime minister was killed by a foreign terrorist organisation (LTTE)," he said.
The PAB, headed by Vellore District Collector C Rajendran, which had on January 20 heard 44-year-old Nalini and two others inside the Vellore prison, in its report listed the grounds for rejection of her plea and observed that the gravity of the crime committed was heinous.
"Nalini had harboured the prime accused and had been associated with the accused. She became part and parcel of the conspiracy hatched to assassinate former prime minister Rajiv Gandhi in which 18 others also died. She had also been informed about the assassination plot well in advance.
"She had acquired degree and diplomas which does not mean that she had changed her attitude. Even now she does not admit her guilt and she has no regrets for her act," it said.
The report also said if she was released and allowed to stay with her mother and brother, who were earlier imprisoned and released, in the Royapettah locality, it would create a law and order problems.
"Keeping in view all these aspects and the crime committed by her against the nation, the plea of premature release on the ground that she has been incarcerated for about 19 years, cannot be considered," the PAB said in its report.
"Considering the social history, circumstances of criminal behaviour, degree of criminality, her case is not fit for recommendation of premature release," the report said.
The PAB report also said the prison probation officer in his July 31, 2009 report recommending her premature release had said Nalini's family had informed him during an inquiry that she would live with them if released and this would not create any problem in the area.
The probation officer had mentioned this input as the main reason for recommending her release.
But the inspector of Royapettah police station had stated that the area was situated close to the American consulate and important political functionaries stayed there and, hence, there was every chance of law and order problems if Nalini was accommodated in the area.
Moreover, the Regional Probationer officer, who is also a member of the PAB, had considered the reports of the probation officer and the inspector and had concurred that the case was not fit for premature release, the report said.