NTIA said it would reissue its request for proposals, inviting ICANN and other applicants to re-apply.
ICANN CEO Rod Beckstrom said NTIA invited his group to meet for a de-briefing on why their proposal was not approved.
ICANN is an international nonprofit organization based in California. Earlier this year, the group began accepting applications for Web domains ending in almost any word or phrase, instead of just traditional endings like ".com" or ".org."
Advertising groups and some government officials criticized the move, warning it could confuse consumers and dilute companies' brands.
The Association of National Advertisers, which has battled ICANN over the domain name expansion, interpreted the Commerce Department's move as "clear message to ICANN that it must seriously address concerns" of its critics.
“This action by NTIA speaks volumes on how serious the problems are with ICANN and its continued need to respond responsibly to the clear demands of the stakeholders it purports to represent,” Bob Liodice, president and CEO, of the Association of National Advertisers, said in a statement.
NTIA declined to comment, pointing to rules that bar the agency from discussing pending contracts.