The movement to legalise marijuana suffered a blow as a ballot proposition that would have allowed the growth, use and taxation of the drug in California was rejected by voters.

The loss of Proposition 19, though not unexpected, was still a disappointment to many of those who had fought and campaigned hard for a measure that had won a lot of support for a subject once considered politically taboo.

The movement was based in the Bay Area city of Oakland and spearheaded by Richard Lee, founder of Oaksterdam University, a cannabis business school that is flourishing around the already legal medical marijuana trade.

At a party that had been intended as a victory celebration but turned into a wake, Lee promised that the movement to legalise the drug would fight on. Clutching a bag of marijuana buds Lee, who uses a wheelchair, said Prop 19 was just part of a long-term struggle that would be back. "We need to do a better job of building a state-wide organisation to educate voters that prohibition is hurting them," he said.

In California, at least, that might not be too hard. The medical marijuana industry has already made the drug commonplace over large stretches of the state, where it is widely available with a doctor's prescription and dispensed in cafes. Though nominally for medical use only, there are few controls on who gets prescriptions and what for. It is even dispensed in the form of marijuana-infused ice-cream.

In downtown Oakland, several city blocks have undergone urban renewal because of Oaksterdam and the numerous marijuana-themed gift shops and cafes that surround it. The businesses also bring hundreds of thousands of dollars each year to the city's cash-strapped coffers in the form of local taxes.

But full legalisation has for now been defeated. Not least among the reasons was the fact that the federal government – in the shape of attorney general Eric Holder – had vowed to crack down on any legalisation process, using federal authority.

Lee said that position had made the campaign in support of Prop 19 very difficult. "It is tough when you have to go against your own federal government and the attorney general," he said. "That is a tough thing to battle."

He added that the high level of support for Prop 19 should at least help the cause of stopping being jailed for using, growing or selling the drug. "45% of people voting for it makes it hard to lock people up for it," he said.

The mood among activists was not all doom and gloom. They have said all along that the process was about starting a debate. "We've already won in terms of education. We are making the case that prohibition of marijuana is wrong and people will eventually come around to it," said pro-Prop 19 volunteer Rosalinda Montez Palacios.