The MPs, already among Africa's highest paid lawmakers, had wanted the money to be paid when parliament breaks up ahead of elections due in March 2013.
|Protesters in Nairobi demanded to |
know where the bonus money would come from
Mr Kibaki said the bonuses were unconstitutional and unaffordable given the country's financial situation.
Kenya's 222 lawmakers receive a tax-free salary of about $10,000 (£6,200) a month. The minimum wage in Nairobi is about $1,500 a year.
But on Thursday they introduced a last-minute amendment to the Finance Act which would have seen them receive the bonus - 2bn Kenyan shillings - as a send-off package.
Analysts says tax increases were likely in order to foot the $23m bill.
In a statement on Tuesday, Mr Kibaki's office rejected the bid, saying he "objected to the amendment on the grounds that it was first unconstitutional, and secondly untenable in the prevailing economic circumstances in the country".
It comes shortly after salaries for teachers and doctors were increased after weeks of strikes over pay and conditions.
Prime Minister Raila Odinga also expressed his opposition to the bid, saying earlier on Twitter: "I would like to make it clear as I did this past weekend that I am against the MP's gratuity bonus."
According to the AFP news agency, someone earning the minimum wage in Kenya would have to work for 61 years to earn the equivalent of an MP's proposed bonus.
More than 100 people had marched through the capital carrying placards denouncing the MPs as "thieves" and "greedy hyenas".
They then marched towards parliament and camped outside, chanting "mwizi", which means thief in Kiswahili, when any MP drove by.
"How come our teachers had to strike for three weeks to get a salary hike, yet within a single sitting the MPs could easily increase their remuneration?" said Morris Odhiambo, one of the protest organisers.
"Where is the two billion shillings going to come from?"
Rights groups, including Transparency International and the Kenyan Human Rights Commission, had issued a joint statement describing the bonus move as "extremely disturbing".
They called on Kenyans to let MPs know "that they are not willing to foot the cost of their greed".