Campaigners say the vegetation on top of the reservoir is a "green lung"
Councillors have unanimously voted against granting planning permission to build almost 100 new homes at a Berkshire reservoir.
Thames Water submitted a revised planning bid for Reading's Bath Road site which it wants to sell to developers early next year.
But opponents said the 5.4 acre (2.2 hectare) underground reservoir, was a "green lung" for the town.
Thames Water said it was "disappointed" with the decision.
The council spent more than three-and-a-half hours deliberating the plans.
Reading Borough Council also received more than 400 letters of protest in opposition to the application.
Speaking after the meeting, Graham Griffiths, from Save the Bath Road Reservoir group, told BBC News: "We are thrilled with the planning committee coming out in our favour."
The group said the vegetation covering the underground reservoir had been untouched for decades, allowing wildlife such as deer, foxes and badgers to flourish.
They wanted to see Thames Water turn the area into an educational resource for local schools.
Meanwhile, Reading MP Martin Salter said: "It has been a long road and highly effective campaign.
"This [result] represents a significant victory for people power".
He added that the plans were "rejected on the basis of 10 specific [technical] reasons" to be discussed by the committee at a later date.
Councillor Paul Gittings, Reading's lead councillor for environment and sustainability, echoed Mr Salter's comments, saying: "It is a triumph for the campaigners and I am delighted.
"They gained overwhelming support from across Reading, it is a very special site."
A previous planning bid for the site by Thames Water was turned down last year.
In a statement, the company said: "Naturally we are disappointed in the planning committee's decision.
"But until we have received confirmation as to the grounds of refusal and consider our position we do not feel it is appropriate to comment further at this stage."
The firm has previously said it had a duty to customers to get the maximum value from selling the land, once it was no longer needed early next year.
It said it was obtaining planning permission to make the site worth much more.