She made it to the final 12 contestants but failed to move forward into the final five in the glitzy Miss Universe Canada pageant on Saturday night.
Ms Jenna Talackova, 23, who is the first-ever transgender contestant to participate in the pageant, competed against 61 other contestants. While she did not win the crown, the 1.81-metre tall beauty garnered the most attention and cheers from the audience each time she appeared on stage.
The crown and advances to the international Miss Universe competition in December, however, went to Sahar Biniaz, 26, reported Associated Press.
Ms Talackova, who was one of the four contestants who were named Miss Congeniality, drew international attention in April after she was denied entry into the contest.
The Vancouver, British Columbia, native was born a male and had underwent gender assignment surgery four years ago. She now owns a Canadian passport, driver's license and other documents that identify her as a woman.
The rules of the pageant, which is run by Donald Trump's New York City-based organisation, states that entrants must be "naturally born" females.
Shortly after she and her Los Angeles celebrity lawyer Gloria Allred announced a news conference, the Miss Universe organisation did a U-turn and released a statement in their Canada website, saying that Ms Talackova can compete "provided she meets the legal gender recognition requirements of Canada, and the standards established by other international competitions".
Miss Universe organisers have not elaborated on the statement, reported Associated Press.
Ms Talackova's sex change was hardly a secret before the event. She had competed in the 2010 Tiffany Miss International Queen Competition in Pattaya, Thailand, a pageant for transgendered and transsexual women.
In a video interview for the pageant, she said she began hormone therapy at 14 and changed her sex at 19.
The controversy surrounding her participation in Miss Universe Canda erupted when a blogger recognised her from the transsexual beauty contest in Thailand and posted about it.
Miss Universe now says that transgender competitors are welcome at all of its pageants around the world, but will leave it to the individual franchises to decide.
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