Councillors have refused planning permission for 76 new homes and a health centre near a village school.
The houses and new medical centre were earmarked for land on Melling Road close to Hornby Park School in the village of Hornby.
But residents say new housing would "urbanise" an Area of Outstanding Natural Beauty.
Lancaster City Council received 49 objections from the public and then last week received a petition from 68 residents who were against the scheme.
The council's planning regulatory committee, a group of elected councillors, refused planning permission at a meeting held at Morecambe Town Hall on Monday.
Sally Riley, a Gressingham parish councillor, told the meeting it would be "the wrong scheme in the wrong place based on the wrong data".
Councillor Ross Hunter, city councillor for Upper Lune Valley, said: "Hornby needs more housing, but not these houses, and not there."
But John Winstanley, from developers Story Homes, said the plans had support from "53 per cent of the community" and from the existing Lunesdale medical surgery which serves Hornby and Kirkby Lonsdale.
The Lunesdale Surgery wrote a letter in support of the scheme, speaking of "our hope for Hornby Surgery to move to a new modern purpose built surgery as part of the proposed development".
Mr Winstanley said a new health centre would be a "real game-changer for the level of health care provided to the community".
He also said that 30 of the new homes would have been classed as 'affordable housing'.
The council had also received 20 messages of support for the plans, which were first submitted back in 2018.
However, council planning officers said that "exceptional circumstances" were needed to warrant building on land classified as an Area of Outstanding Natural Beauty.
A council report said: "It is considered that exceptional circumstances do not exist and the development would have a significant impact on the character and appearance of the designated landscape.
"Whilst the council cannot currently demonstrate a five year supply of deliverable housing site, this does not in itself provide exceptional circumstances and the type of development proposed would also fail to meet a specific identified local need or provide an acceptable level of affordable housing or all housing to an appropriate standard.
"In addition to the above, the scheme fails to reflect the local distinctiveness of the area, in terms of its layout, scale and design and would appear detached from the existing settlement.
"The proposal also fails to provide an acceptable safe and suitable access to serve the development, would have a detrimental impact on highway safety and would potentially impact on the operation of the bus service.
"It fails to fully assess the flood risk at the site, show how these risks will be adequately mitigated or demonstrate how surface water would be effectively managed to ensure that the development does not present risks of flooding on-site or off-site."
Council officers recommended that the plans be refused, and councillors agreed with a unanimous vote.
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