Dapagliflozin (Forxiga) launched in the UK late last year and was approved by the Scottish Medicines Consortium in January as an add-on therapy with metformin.
However, NICE said it was unable to recommend the treatment in combination with insulin due to 'significant uncertainty' about results presented by the manufacturers, Bristol-Myers Squibb and AstraZeneca.
The institute has asked for further information on cost-effectiveness from the companies ahead of a further meeting about the drug in April.
Professor Carole Longson, director of NICE's health technology evaluation centre, said: 'Type 2 diabetes is a serious problem in the UK and it is important that there is a range of different treatment options available. Unfortunately, the appraisal committee is currently unable to recommend dapagliflozin, one of the options, for the treatment of this condition.'
Amadou Diarra, vice president and general manager UK and Ireland at Bristol Myers-Squibb, said: 'Bristol-Myers Squibb and AstraZeneca are disappointed with the outcome today, particularly given the alliance responded in full to the questions raised prior to the appraisal committee meeting. We submitted a robust dossier of information, which included an externally-validated cost-effectiveness model.'
The companies said they will provide additional information and analysis on the cost-effectiveness model to NICE.
Dapagliflozin is a new type of diabetes treatment class called sodium-glucose cotransporter 2 (SGLT2) inhibitors. The oral, once-daily drug works by reducing the amount of glucose reabsorbed by the kidney and increasing glucose excretion in urine.
Research had shown the drug can reduce blood glucose by a similar amount as sulphoylurea plus metformin, and can also encourage weight loss.