Officials, speaking at an early morning press conference, also offered a $23m donation for human rights training in the US, a brash riposte to recent US criticism of Ecuador's own human rights record.
Betty Tola, the minister of political coordination, said the asylum request had not been processed because Snowden, who is believed to be at Moscow airport, was neither in Ecuador nor at an Ecuadorean embassy or consulate. "The petitioner is not in Ecuadorean territory as the law requires."
Tola also said Ecuador had not supplied any travel document or diplomatic letter to Snowden, who is reportedly marooned in Moscow airport's transit lounge because his US passport has been invalidated.
A document leaked to Univision on Wednesday showed that someone at Ecuador's consulate in London did issue a safe conduct pass for the fugitive on June 22, as he prepared to leave Hong Kong. The name of the consul general, Fidel Narvaez, was printed but not signed.
Tola said it was unauthorised: "Any document of this type has no validity and is the exclusive responsibility of the person who issued it."
The renunciation underlined divisions within Ecuador's government between leftists who have embraced Snowden as an anti-imperialist symbol and centrists who fear diplomatic and economic damage.
Some in the government are believed to be annoyed that Julian Assange, the WikiLeaks founder who has sheltered at Ecuador's London embassy to avoid extradition, has seized the limelight in the Snowden saga. Assange caught Quito by surprise last week when he announced Snowden had been given a safe conduct pass. Quito replaced its ambassador to London earlier this month in hope of better managing its famous guest.
The waiving of preferential trade rights followed threats from members of the US congress to drop the ATPA in July, when it is due for renewal, unless Ecuador toed the line on Snowden.
"Ecuador does not accept pressure or threats from anyone, nor does it trade with principles or submit them to mercantile interests, however important those may be," said Fernando Alvarado, the communications secretary.
"Ecuador gives up, unilaterally and irrevocably, the said customs benefits."
The announcement will enhance President Correa's reputation as a bold leader unafraid to defy the US, just like the late Venezuelan president, Hugo Chávez.
Tactical calculation lay behind the decision. Even before the Snowden affair Quito feared losing the trade preferences, largely because of Republican antipathy to Ecuador's outspoken socialist leader.
"The Ecuadorans got word that renewal of ATPDEA was a long shot in any case, so instead of waiting for rejection, they took the initiative and the high road," said Michael Shifter, of the Inter-American Dialogue.
Correa loved a fight and was responding to perceived US hypocrisy and heavy-handedness, said Shifter. But the president had showed caution in refraining, so far, from granting Snowden asylum. "He appears to be weighing the political and public relations benefits against the real consequences for Ecuador's economy, should he grant the asylum request."
Juan Carlos Calderon, the editorial of Vanguardia, a weekly which has had its offices raided and staff threatened in disputes with the president, said Correa's firebrand image masked shrewd, pragmatic calculation.
Even before the Snowden affair the president tried to soothe Ecuadoreans that losing the trade preferences, which exclude thousands of products such as roses, tuna and broccoli from export duty, would have a small impact.
Not all are convinced. "This will have serious consequence for Ecuadorean producers," said Ramiro Crespo, director general of Analytica Investments, a Quito-based consultancy.
"These products which are exported to the United States have become major industries in Ecuador. If commerce is restricted there's going to be unemployment … This does not penalise the government, it penalises the people."
Additional reporting by Dan Collyns