Special CBI Judge G K Upadhyaya passed the order after hearing the bail plea.
The court observed that there are eye catching evidence in the form of statements recorded under the CrPc. It further said that there is every likelihood that if the applicant is released on bail he may misuse his political powers to hamper investigation in the case.
Shah, the former minister of state for home and a close aide of Chief Minister Narendra Modi, was arrested by CBI on July 25 in connection with the fake encounter case and was charged with murder, extortion and kidnapping.
The bail application was filed on July 26, a day after his arrest.
Senior counsel Ram Jethmalani represented the case of Shah, while K T S Tulsi appeared for CBI.
Four IPS officers have been arrested in the case so far by the probe agencies. The role of then investigating officer Geeta Johri is also under scanner.
Sohrabuddin was killed on the city outskirts in a joint encounter by Gujarat and Rajasthan police in November 2005, and later his wife Kauser Bi was also allegedly murdered.