"A strong domestically owned and operated steel industry represents an essential national security priority and is critical for resilient supply chains," Biden said in a statement.
"Without domestic steel production and domestic steel workers, our nation is less strong and less secure."
The Committee on Foreign Investment in the United States (CFIUS) spent months reviewing the deal for national security risks but referred the decision to Biden in December, after failing to reach consensus.
Nippon Steel offered the US government a veto on production as part of its bid for US Steel. (AP PHOTO)
Nippon paid a hefty premium to clinch the $US14.9-billion ($A24-billion) deal and made several concessions including a last-ditch gambit to give the US government veto power over changes to output but to no avail.
In a statement, Nippon and US Steel criticised Biden's decision, calling it a "clear violation of due process" and a political move, and saying they would "take all appropriate action" to protect their legal rights.
Pittsburgh-based US Steel had warned that thousands of jobs would be at risk without the deal.
But the United Steelworkers union, which opposed the merger from the outset, praised Biden's decision, with USW President David McCall saying the union has "no doubt that it's the right move for our members and our national security".
Biden has previously said he wants US Steel to stay domestically owned and run while president-elect Donald Trump has also vowed to block a foreign takeover of the storied firm after he takes office on January 20.
In a November letter, Japanese Prime Minister Shigeru Ishiba urged Biden to approve the merger so as to avoid marring recent efforts to strengthen ties between the two countries, Reuters has reported.
A spokesperson for Ishiba could not be reached for comment on Friday before the announcement and Japan's trade ministry declined to comment, saying there had been no formal announcement of a decision.
Blocking the deal may dissuade international investors from bidding for politically sensitive US companies with a unionised workforce in the short term, said Alistair Ramsay, vice president of steel research at consultancy Rystad Energy.
"Big bids are a risky idea less than 12 months from a presidential election but big steel producers with traditional operating furnaces, such as Nippon Steel, see the US as an excellent place to produce steel in the long term, despite the market depression there," he added.
Nippon has vowed to fight in the courts any decision to halt the deal but lawyers including Nick Wall, M&A partner at Allen & Overy, have said mounting any such legal challenge against the US government would be tough.
The two companies had sought to assuage concerns over the merger.
Nippon offered to move its US headquarters to Pittsburgh, where the US steelmaker is based, and promised to honour all agreements in place between US Steel and the USW.
"It is difficult to fully understand the risks involved in Nippon Steel's potential acquisition of US Steel," a Japanese government official, who spoke on condition of anonymity, said.
"Nippon Steel has done everything to eliminate risks related to economic securities, including committing not to reduce production."
Nippon Steel faces a $US565 million penalty payment to US Steel following the deal's collapse, which is set to prompt a major rethink of its overseas-focused growth strategy.
With the acquisition of US Steel, Nippon Steel aimed to raise its global output capacity to 85 million tonnes a year from the current 65 million, nearing its long-term goal of taking capacity to 100 million tonnes.
US Steel has previously said the deal's failure would put at risk thousands of jobs and it might be forced to close some steel mills, an assertion the USW described as a baseless threat and intimidation.
