Ai had asked the Chaoyang District court to overturn the city tax office's rejection of his appeal against the tax evasion penalty imposed on the company he works for, Beijing Fake Cultural Development Ltd., which produces his art and designs.

The artist said that Chinese police barred him from showing up in person, saying earlier he had "absolutely no hope" the court would rule in his favor.

"Today's verdict shows that this country, more than 60 years after its founding still has no basic legal process, still has no respect for the truth, still will never give taxpayers and citizens an ability to justify themselves," Ai said.

"The entire judiciary is shrouded in darkness," he told reporters at his home in northeastern Beijing after the verdict, adding that he would now sue the Chaoyang court in a higher court, ensuring he will remain a thorn in the government's side.

The case adds to China's already tarnished international image, at least in the West, coming on the heels of a score of other high profile cases, including the fleeing to the U.S. embassy of blind self-taught legal activist Chen Guangcheng.

"It has cost them dearly, but I think it reflects where the Chinese authorities are at," said Corinna-Barbara Francis, Amnesty International's China researcher.

"It reflects how precarious their position is," she added. "Obviously it comes from deep insecurity that they would have to go after someone like him."

China and the United States will hold their next human rights dialogue in Washington next week.

The loss of Ai's appeal underscores top leaders' increasing intolerance of dissent ahead of a tricky generational transition of power at the end of the year, when Vice President Xi Jinping almost certainly will be anointed to take over from Hu Jintao.

DOZENS OF POLICE

Dozens of police and police cars flanked the road leading to the courthouse. Ai's wife, Lu Qing, was allowed to attend.

The Chaoyang District Court heard the case at a closed hearing in June, that in itself was a departure from the consistent refusal by the strictly controlled courts to give dissidents any hearing.

Ai, 55, had called the hearing unfair after police warned him to stay away and blocked journalists from approaching the cramped court room which only had five seats.

The court did not answer calls seeking comment.

Tax authorities are demanding the company that markets his work pay a 15 million yuan ($2.4 million) penalty for tax evasion.

Government efforts to muzzle Ai have frequently backfired, as demonstrated by an outpouring of public sympathy - and cash - in response to the tax penalty. About 30,000 people donated money to help Ai cover an 8.45 million yuan bond required to contest the tax charges. Many of Ai's supporters folded money into paper planes that were flown over the walls of his home.

Clad in a grey t-shirt with his face and the words "missing" and "found" printed on it, Ai said he would not pay the remaining fine of around 6 million yuan and that he has no hope of recovering the bond already lodged with the tax authorities.

The fine is unlikely to put too much of a dent into Ai's finances, as his works go for hundreds of thousands of dollars and his profile has been raised yet further on the global stage after his repeated run-ins with the authorities.

Supporters of Ai, whose 81-day detention last year sparked an international outcry, have said the tax case is part of the government's effort to muzzle China's most famous social critic.

"I feel that in China, in recent years, its biggest effort that it has taken in maintaining stability is to eliminate any person who's willing to speak out for the truth," Ai said.

"I've said this before, that if you start caring about this country, then you're on the path towards criminality," he said.

The company's lawyer, Pu Zhiqiang, said the outcome was expected.

"I knew the regime could be shameless, but I didn't quite believe that a regime could act so shamelessly that they become rascals," the rights lawyer said.

Ai has said that even if he eventually loses his case, Chinese citizens can at least use it as an example to debate and hold government bodies to account.

($1 = 6.3702 Chinese yuan)

(Additional reporting by Ben Blanchard and Michael Martina, Editing by Jonathan Thatcher)

• A Permanent Economic Emergency