Sheffield City Council told the AJ that the scheme was now 'on ice' because Menta was in 'financial difficulties' and on the point of administration.
But Sheffield planners rejected the housing venture because the proposed development land - now owned by Menta - is a former Union Carbide Corporation site and earmarked for industrial use only.
In 1984 nearly 4,000 people died and thousands more were left disabled by a lethal chemical cloud leaking from a Union Carbide plant in Bhopal, India.
Sheffield City Council director of development services, David Curtis, said: 'The proposed [housing] site, which is also owned by Menta, is a former Union Carbide industrial site and it would contravene planning laws to allow the building of houses. Therefore we refused planning consent.'
Planners also refused permission because council lawyers advised that the housing development and ski resort - some three miles apart - could not be linked.
Curtis added: 'Separate planning applications were lodged for both projects and each was considered on its own merits. Without housing the [Snow Mountain] scheme is economically unviable.
'The developer is now in difficulties financially. They have a significant funding gap with it and they are on the verge of administration. This is now with the banks,' he continued.
The Snow Mountain project, which now looks increasingly unlikely to happen, is intended to revamp Sheffield's ageing ski village and help drive a wider regeneration programme in the Don Valley.
The scheme included plans for a 300m-long ski hall, new leisure accommodation, a hotel and a gondola cableway link to Sheffield Supertram.
Neither Menta nor FaulknerBrowns were available for comment.