Mr Pickles decided to refuse Lord Derby planning permission for the development on Hatchfield Farm on the advice of the planning inspector.
A public inquiry was held last year after Forest Heath District Council rejected the proposals.
Rachel Hood, of Save Historic Newmarket Action Group, said she was "incredibly grateful" for the decision.
Lord Derby said he would be "taking the time to digest more fully the inspector's report, before deciding on any future course of action".
Mrs Hood, chairman of the action group, said the development, which would also have included office space and shops, would have turned Newmarket into a "nondescript clone town".
"These plans, which were turned down unanimously two years ago by the district councillors, would have increased the size of Newmarket by a third and would have led in time to the destruction of Newmarket as the home of international horse racing," she said.
Lord Derby said: "Though disappointed with the secretary of state's decision, I am pleased that both he and the inspector concluded that the proposal would not have had an adverse impact on the horse racing industry, despite what has been repeatedly claimed.
"Similarly they found no fault with the scheme's highway proposals.
"They also confirmed that Newmarket is the most sustainable town in the district, the housing needs of which could still, I believe, be served by Hatchfield."
Mr Hancock, Conservative MP for West Suffolk, welcomed the secretary of state's decision.
"The inspector has upheld the decision of the council that 1,200 houses is wrong for Newmarket, and would harm its economy, which is intertwined with its role as the global home of horse racing," he said.
"Now we need to put aside differences and work together to improve the future of a town for the benefit of all."
Plans for 1,200 new houses to be built in Newmarket have been rejected by Communities Secretary Eric Pickles.