Taylor Wimpey's plans for 650 homes on the site of the former Whittingham Hospital have been rejected by Preston council on the grounds it would increase road congestion.
Councillors voted against the scheme, on 147 acres owned by English Partnerships, claiming that existing developments in the area were causing pressure on the A6 that should not be exacerbated.
The council wants a new junction to be built on the M6 at Stubbins Lane, near Garstang.
A spokesman for Taylor Wimpey said in a statement: "We are disappointed at the decision made by Preston Council's planning committee. Despite a recommendation to approve, the members of the planning committee voted against their own officer's recommendation and refused the application.
"We will be working with our partners – national regeneration agency English Partnerships and Preston City Council – to consider the issues raised and agree a way forward."
English Partnerships declined to comment.