In March 2008 developer Don Allen secured council approval to build a five-storey, 429-space car park with five retail shops - to be called Paterson Central - on the site of the Birchalls car park.

However, Mr Allen struggled to attract tenants for the 18.5-metre tall development and - only four months after gaining approval - he announced it was unlikely to be built any time soon.

The council last month received a request to extend the planning permit for the development by another two years, with Mr Allen claiming the global financial crisis had hindered interest from prospective tenants.

However, on Monday the council voted against granting an extension, effectively scrapping the proposal.

The RSL's Anzac House was demolished in 1997 to make way for development on the site, which has since been used as a private car park.

Several aldermen agreed that while the plans had not changed in the past two years, the council's policies and procedures for CBD development had.

Alderman Ivan Dean said the site was important to the city's future and had to be developed appropriately.

"This is a critical part of Launceston and the streetscape of the city," Alderman Dean said.

"There is an opportunity here for a better outcome - and it needs to go back to the drawing board.

"Let's get a development that is acceptable and much better for Launceston."

Alderman Jeremy Ball said the proposal was not consistent with the council's sustainable transport and parking strategy.

"No one is saying there should be no development on this site - far from it; this is a fantastic site for development," Alderman Ball said.

"But when we are developing a site like this, let's make it top drawer.

"By denying this extension we are not saying no to development on the site. We are simply telling the developer he has had his two years."