The scheme to build on land close to Clifford's Tower has been rejected
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Plans for a £60m shopping development in the shadow of York's Clifford's Tower have been turned down by the government.
The planning inspector who led the public inquiry into "Coppergate II" said the plans were not of a high enough quality.
The inspector also said the benefits the development would bring did not outweigh the damage it would do to a historic area.
City of York Council chiefs, who had backed the development, said it was "a major setback in the development of a vibrant city centre."
An official at the office of the Deputy Prime Minister John Prescott, which had scrutinised the controversial scheme, said it had been rejected because of concerns about the historic setting.
The statement said: "The Secretary of State is concerned that the siting of the development in relation to Clifford's Tower fails to have sufficient regard to the desirability of preserving the listed building and its setting."
Gordon Campbell-Thomas, a leading opponent of the proposed shopping development near the Castle Museum site told BBC News Online he was extremely happy with the decision.
"I feel the same way a lot of people in York now feel, the government have seen what we have been saying for years and years.
"It (the scheme) was something that shouldn't have happened.
"We can't let crass commercialism have sway.
"I am ecstatically happy the government has seen it our way, it's a vindication for the voice of the people."
And he added: "It also means we need to look at positive ways to move forward.
Vision for future
"At the moment we have an ugly car park, we need to develop a green and open space, create a real vision for future generations.
"We need somewhere for people to come and enjoy history that is a part of York."
But Roy Templeman, the council's director of environment and development, said: "We are obviously very disappointed that the plans have been rejected.
"We have worked closely with the developers, Land Securities, and a range of other partners, including English Heritage, to bring the plans to this stage.
"With the rejection of the Coppergate development we will have to look at other ways of strengthening York's competitiveness within the city centre, other regional shopping centres and out-of-town developments."