The new hotel project was to be located on the River Swilly in Tullygay, but the planning authority has now refused permission for the 110-bedroom scheme.
The application, submitted by Edward Tinney, would have included a swimming pool, gymnasium and a beauty facility, as well as over 650 parking spaces.
The design also encompassed a new bridge across the nearby river.
However, an appeal was lodged by Frank Tinney would said the land was zoned for farming only.
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Mr F. Tinney raised concerns about increased water level that would be created by the development, which could impact on this land. He also queried access to the new bridge for locals.
The opposition was upheld by An Bord Pleanála as the proposed development would "contribute to the sporadic and haphazard pattern of development in the environs of Letterkenny", and would create an "undesirable precedent for similar developments into the future".
The planning body also accepted flood risk to nearby lands would be contrary to the proper planning and sustainable development of the area.
However, it was better news for a Letterkenny quarrying firm. The planning body has granted a controversial extension to the Mountain Top facility.
Permission has been given to Mountain Top Quarry Ltd for retention of the removal of topsoil and extension to their existing quarry at Calhame.
Local residents lodged a complaint to the expansion, due to increased dust, noise, blasting and sludge on the local road network.
The appeal stated: "The failure of the applicants to operate the existing quarry in a satisfactory manner does not inspire confidence."
But the quarry argued it had been operating before the new houses were built in the area.
(PR/JM)
