Centros' proposed retail scheme in Lancaster should be called in for a public inquiry by the Secretary of State for Communities and Local Government, according to watchdog English Heritage.
The developer resubmitted a planning application with a reduced retail element in the summer after years of hard-fought consultation over the controversial project.
Lancaster City Council granted outline consent for the £150m, 10-acre scheme in October. Centros proposes 320,000 sq ft of new retail space, including a 97,500 sq ft Debenhams department store, and up to 179 town houses and apartments alongside other uses.
Henry Owen-John, North West planning and development director for English Heritage, believes the scheme is still damaging. He said: "Implementing this scheme would cause lasting harm to Lancaster and damage much of what makes the city such a distinctive and special place.
"There is no doubt that this part of Lancaster needs regenerating. We have negotiated at length with the developer but it was not possible to secure a scheme which responded to, and was inspired by, the distinctive historic character of this part of the city.
"There is every reason why Lancaster's heritage should play a part in the regeneration plans and help deliver a scheme with real identity and character."
Last week, protestors chained themselves to the fence outside Centros' offices in London.