What is the ruling on an Imam refusing to lead in prayer a worshipper who is wearing trousers above the knee, on the pretext that it is forbidden, and is the Imam entitled to refuse to lead those who pray with him?

It is not permissible for the Imam to refuse to pray with someone whom he believes has an invalid prayer, because the Imam's prayer is valid in all circumstances. The correct view is that the Imam's prayer is not dependent on the prayer of the congregant. If the congregant believes his prayer to be valid, then the Imam's prayer with him is valid, and there is no denunciation in matters of ijtihad (independent reasoning).