Dun Laoghaire/Rathdown County Council had been split over the plan, which would have seen a zoning change to pave the way for the development.
But the idea was defeated without a vote, following intense pressure from opponents.
Councillors were being asked to decide whether to vary the local authority's county development plan to allow for a seven-hectare site at Ticknock, near Sandyford, to be built on.
In September, a majority of representatives ignored county manager Owen Keegan's advice that the proposal should be rejected, instead putting it out to public consultation.
However, more than two-thirds of the 100 subsequent submissions were objections.
Further pressure was applied from opponents in recent days.
Prior to the decision last night, Labour councillor Lettie McCarthy told of her concern that the planning variation would be passed.
"The Dublin Mountains are a wonderful asset for us to have and they should be retained as a recreational amenity," she said.
The mountains are very accessible by public transport and "we should appreciate what we have", Ms McCarthy said.
Fine Gael's Neale Richmond admitted his party was split on the issue. "There is no consensus," he said before yesterday's meeting.
Those who argued for the scheme said there was a serious need for a retirement village in the area and the development would have created much-needed jobs.
The land in question is zoned to "protect and improve rural amenity and to provide for the development of agriculture".
If the proposal had been agreed, the land would have been available in the future for "residential [independent, assisted and convalescent living], ancillary medical and related uses, associated retail, pharmacy, restaurant, care centres, community facilities and village centre uses".
Separately, councillors voted to call on Environment Minister Phil Hogan to review his decision to grant exploration licences to Providence Resources off the Dalkey coast.
The politicians agreed to call on Mr Hogan to review the licences and to suspend all activity pending the review.