The borough's planning committee unexpectedly rejected the huge £53 million Mildmay Urban Village 'supportive housing' project in Shoreditch, east London, despite support for the scheme from both CABE and the authority's own planners.
Backed by a consortium including homeless charity Crisis, the 400-home social and private development would have been the first of its kind in the UK and is based on the Common Ground project, a successful US programme that has helped to house homeless people.
As well as providing a new hospital to replace an existing 'out-dated and inefficient' Victorian facility, the scheme features five six-storey buildings and a 23-storey residential block.
But it appears that the size and possible impact of this landmark tower stuck in the planning committee's throat.
In the formal 'refusal' document, the council warned that the development would have an 'adverse impact on the residential amenity, particularly in terms of daylight and sunlight'.
There were also fears that the scheme, drawn up with Matthew Lloyd Architects, was 'insensitive to the surrounding area'.
FCB founder Keith Bradley, who has worked on the project for almost four years, believes the criticisms were unfair.
He said: 'The scheme has been carefully mapped in terms of daylight and sunlight, demonstrating that there is no significant impact on the surrounding properties. This was independently checked by Tower Hamlets as part of the case officer's report recommending approval to the committee.'
He added: 'We're continuing to work with Crisis and Genesis [Housing Association] to find a way forward.'
A Crisis spokeswoman maintained that the decision would not spell the end for the project, which has been partly funded by Pink Floyd guitarist David Gilmour.
'We have hit the planning buffers,' she said. 'The planning committee declined the application even though it had officer support. This came as a surprise.
'We are committed to the scheme, which we see as a vision for social integration in the UK. We are now considering what the next steps may be.'