Both plans included a refurbishment of the abandoned lido
Campaigners have been given two years to fund the redevelopment of Edwardian swimming pool in Berkshire after a "complete reversal" by councillors.
Askett Hawk, which wanted to save the Kings Meadow Pool lido in Caversham and build a hotel alongside, was named as preferred developer in April.
But Reading council rejected the plan on Monday night saying it doubted planning issues could be overcome.
Askett Hawk criticised the decision which it labelled as "political".
Campaigners opposed the developer's plan calling for a community-focused approach rather than a business site with little public access to the surrounding green areas.
Bob O'Neill, from the King's Meadow Trust Campaign, said: "We were just astounded, completely delighted [with] what the council has done, a complete reversal.
"Now we want to work with the council and make this a success.
"We want them to help us find the money, we are going to get sponsors, community bids and really work on it."
He said a cost of £2.5m was projected to get the site developed but hoped this would be reduced from offers of free labour.
He said the group's plan would include an ice rink installed over the pool in winter months and a new cafeteria.
Previous plans for a new hotel and leisure complex were shelved when the 1902-built lido, which has not been in use since 1974, won Grade II listed status from demolition.
Reading borough councillor Graham Hoskin, member for culture and sport, said: "Clearly people care deeply about the baths.
"There was a lot to offer [from the Askett Hawk plan] ...but at the end of the day there were planning issues we didn't think they could overcome."
But Askett Hawk refuted suggestions it would not have been able to get the plan off the ground.
David Adams, development director, said: "We were extremely surprised, especially after we were selected as preferred bidder.
"In this difficult economic time we are surprised Reading turned down tens of millions of pounds worth of investments.
"We have a great deal of expertise in developing listed buildings and the decision should not be based on planning.
"I think it is a political decision."
But Mr Adams said he did not rule out future involvement if the chance arose.