The bill, proposed by the small Party for the Animals, stipulates that livestock must be stunned before being slaughtered, contrary to Muslim halal and Jewish kosher laws, which require animals to be conscious.
The lower house of parliament passed the bill a year ago, leaving a loophole saying religious groups could continue ritual slaughter if they proved it was no more painful than other methods of slaughter.
But the Senate rejected the bill on Tuesday by 51 votes to 21, meaning it cannot become law.
Dutch Muslims, mostly of Turkish and Moroccan origin, had complained they felt stigmatized by the measure.
European Union regulations require animals to be stunned before slaughter but allow exceptions for ritual slaughter, which the European Court of Human Rights has ruled is a religious right.