The loss of Ai's second appeal in a higher court means that the world-renowned artist could risk arrest if he does not pay a remaining fine of around 6.6 million yuan ($1.05 million), in a case that has further tarnished China's poor human rights reputation.

He has paid a bond of 8.45 million yuan already lodged with the tax authorities to contest the tax charge.

Ai, whose 81-day detention last year sparked an international outcry, told Reuters he will not pay the remaining fine as that would be tacit acknowledgement of the case's legality, which he has always maintained is trumped up.

Ai said he is uncertain whether he faces arrest if he doesn't do so.

"If I need to go to jail, there's nothing I can do about it," Ai said. "This country has no fairness and justice, even if I've paid the 6 million yuan, I still could possibly go to jail. They don't need an excuse to arrest me - they can always find another excuse at any time."

The case is widely seen by activists as an attempt to muzzle the outspoken artist, who has repeatedly criticized the Chinese government for flouting the rule of law and the rights of citizens.

Ai, 55, had asked the Chaoyang District Court to overturn the city tax office's rejection of his appeal against the 15 million yuan ($2.38 million) tax evasion penalty imposed on the company he works for, Beijing Fake Cultural Development Ltd, which produces his art and designs.

Ai, who has waged a near five-month long legal battle with a Beijing tax agency, said he could not appeal further and has not enough cash to pay the remaining 6.6 million yuan, adding that the tax agency has not given him a deadline to pay.

Government efforts to silence Ai have frequently backfired, as demonstrated by an outpouring of public sympathy - and cash - in response to the tax penalty.

Ai had collected more than 9 million yuan, he says he will start to return, from about 30,000 donors, to pay the bond. Many of Ai's supporters folded money into paper planes that were flown over the walls of his home.

Earlier, an angry Ai, who was allowed to attend court in person for the first time and without an obvious police presence, said he scolded the judge for being a "shame and a disgrace".

"It (the court) didn't respect the facts or give us a chance to defend ourselves; it has no regard for taxpayers' rights," he told reporters.

He said the court had flouted Chinese law by not providing a written notification of the appeal verdict three days in advance, and only notifying his wife, Lu Qing, by telephone earlier this week. One of his lawyers, Pu Zhiqiang, is in France and could not make it back in time.

Ai's loss of his appeal is a predictable outcome in a country where the courts, controlled by the ruling Communist Party, toe the government line. It also underscores Beijing's increasing intolerance of dissent ahead of a tricky transition of power later this year.

"I never imagined the court would disregard the facts this much, be so unreasonable and so insulting," Ai said.

($1 = 6.3066 Chinese yuan)