Mr Gove, Environment Secretary received just 75 votes, not enough to pip Jeremy Hunt, Foreign Secretary to second place. Mr Hunt received 77 votes and will face Boris Johnson in the final head-to-head stage of the leadership campaign. Mr Johnson receives the front-runner after receiving 160 votes.
There was one spoilt ballot paper so only 312 of the 313 Tory MPs votes were counted.
Mr Gove has since said he is “naturally disappointed” but said it had been an “honour to be able to set out a vision for the future of our great country”.
He wrote on Twitter: “Naturally disappointed but so proud of the campaign we ran. Huge thanks to my brilliant campaign team. It’s been an honour to be able to set out a vision for the future of our great country. Manycongratulations to Boris and Jeremy!”
Mr Johnson said he is “deeply honoured” and is looking forward to “create a brighter future for all of us”
He wrote on Twitter: “I’m deeply honoured to have secured more than 50 per cent of the vote in the final ballot. Thank you to everyone for your support! I look forward to getting out across the UK and to set out my plan to deliver Brexit, unite our country, and create a brighter future for all of us.”
The pair will spend the next few weeks travelling Britain to 16 separate hustings events.
The next Tory leader will then be decided by a postal vote of Tory members.
Supporters of Mr Gove had been quietly confident of getting through the final ballot after he secured second place in the fourth vote at 1pm today.
Just two votes separated Mr Gove, on 61, and Mr Hunt, on 59, in the fourth ballot – the first time the Environment Secretary had come second.
However following the elimination of Sajid Javid, Mr Gove could not win enough of the 34 votes on offer in the penultimate ballot.
Mr Gove had earlier insisted a battle with his old enemy, Mr Johnson, would be a “civilised debate of ideas about the future of our country”.
Meanwhile Jacob Rees-Mogg, a backer of the former London Mayor denied there would be any “dirty tricks” to try and eliminate Mr Gove.
The European Research Group (ERG) chairman said: “I think people should always vote for the candidate they support.
“It is really silly to try and game elections because you can find that your candidate then lose.”
More to follow…