The firm, which supplies 4.2 million households and businesses across the Midlands and parts of Wales, said the approach was tabled at "only a modest premium" to its share price prior to bid interest becoming known.
It emerged on Tuesday that the consortium featuring Canadian investment group Borealis, the Kuwait Investment Office and Universities Superannuation Scheme was interested in making an offer for Severn.
Speculation that a potential bid could be worth around £5.3 billion caused its shares to jump by 14% yesterday to a record high of 2077p, although the stock fell back slightly today after Severn rejected the proposal. Its shares were at 1835p, or £4.3 billion, prior to the bid interest on Monday night.
In a statement, Severn said it met representatives of the consortium for the first time yesterday to consider the approach. It said: "The board of Severn Trent has reviewed the proposal with its advisers and concluded that it completely fails to recognise the existing and potential value of Severn Trent. Accordingly the board has informed the consortium that it has rejected the proposal."
Borealis already co-owns the UK's biggest ports operator Associated British Ports and the London to Paris High Speed 1 rail line. It invests on behalf of thousands of Canadian workers and pensioners in the Ontario Municipal Employees Retirement System.
The Kuwait Investment Authority invests the emirate's vast oil wealth while the Universities Superannuation Scheme invests the pensions of UK higher education workers.
Severn covers an area stretching from the Bristol Channel to the Humber, and from mid-Wales to the East Midlands. It was privatised in 1989 and takes its name from two of Britain's largest rivers - the Severn and the Trent.
Analysts said the timing of the buyout approach was surprising given that regulator Ofwat rules on prices every five years and will next year decide how much bills should rise by between 2015 and 2020.