The new £41m school was first proposed 10 years ago to replace the ageing 1960s building in Duddingston Road.
However, PPAG argued it was building on common good land. Edinburgh Council said it was "extremely disappointed".
Tom Ballantine vice chair of Portobello High School Parents' council, said: "I believe this is a very sad day for the Portobello Community.
"It's certainly a sad day for the young people of the area.
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"This was a fantastic opportunity to get a wonderful new school. It's too early to know where this will go next."
Alison Connelly, PPAG spokeswoman, said: "Today's decision is a crucial step towards securing valuable green space and parkland for future generations not just in Edinburgh, but throughout Scotland.
"The court's decision makes it clear that councils do not have the power to appropriate land such as Portobello Park, what's known as 'common good land', to use for purposes other than recreation."
"Whilst we understand and support the need for a new high school in Portobello, our campaign has always been about preserving green space."
Paul Godzik, Edinburgh City Council's convener of education, children and families, said: "We are surprised and extremely disappointed with today's decision and I am sure the vast majority of the local community will share our disappointment.
"There remains a compelling argument for the new school.
"Although we are urgently considering the judgment with our legal advisors we are ruling nothing out at this stage.
"I have instructed officers to look at the possibility of a further appeal and also to explore all other options."
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