"After examining the different aspects of the US demand, Punjab government refused it and termed it unworkable," an unnamed official told The Express Tribune newspaper.
The US had reportedly proposed that Davis, currently being held in Kot Lakhpat Jail, be shifted to the Governor House, two rooms of which could be declared a sub-jail.
The US also proposed that Davis' trial should be conducted in the Governor House.
The demand was made to ensure safety and well-being of Davis as the American media has expressed concerns that his detention in jail posed a risk to his life.
The Punjab government assured the US that the "best possible security arrangements" have been made for Davis, who was arrested in Lahore on January 27 after he shot and killed two armed men he claimed were trying to rob him.
Police have rejected Davis' claim of acting in self-defence and have booked him for murder.
The Punjab government's decision to hold the trial in jail is aimed at ensuring Davis' safety.
"Every concession provided under the jail manual is being extended to the US national," the official said.
The official said any extra allowance to Davis by the Punjab government could cause resentment among the public.
"Do you think that the religious and extremist groups who are demanding death sentence for the killer will accept this proposition?" the official said while explaining the government's reasons for turning down the US proposal.
"They will never accept the proposal at any cost and under any circumstances," the official remarked.
He said US diplomats who made the demand to the Punjab government were of the view that the federal government and the Punjab Governor would agree to it if it was accepted by provincial authorities.
Before formally refusing the proposal, the Punjab government discussed it with the legal and security departments and examined possible political implications and the public reaction.
The police, intelligence and security departments of Punjab opposed the move, saying Davis may slip out of the Governor House, the official claimed.
"He is an extraordinarily smart and shrewd person who has the skills to dodge the police and the security departments easily," the official said.
The law department also said that shifting Davis would be tantamount to placing the prisoner under the federal government's custody, the official said.
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