It's perfectly legal in most states for the seller to reject a full-price offer, or indeed any offer (unless the reasons are discriminatory). The exception is that in certain states, sellers must accept a full-price, "clean" offer -- that is, one that comes with no contingencies, such as the sale being conditional upon financing or approving the results of a home inspection. But those don't come along very often, and you probably put a contingency or two into your offer.

As for the why, you may never know -- maybe the seller had second thoughts about selling, the seller's agent thinks your agent will be hard to negotiate with, or the seller thinks the list price was too low after all. If the problem could have been fixed, the seller most likely would have counteroffered. Your best bet is to move along to the next property.