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.
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.
More to follow…