Owners of the Wenlock Edge Inn pub, in Much Wenlock, wanted to build the new blocks and a meeting room before reopening the once popular pub.
The plans by the Murray family, who also own the nearby Longville Arms, had been recommended for approval by planning officers.
Protesters who gathered to oppose the plans were today celebrating after the proposals were turned down.
Residents met an hour before yesterday's Shropshire Council south planning committee meeting at Shirehall in Shrewsbury to discuss the proposals for the Wenlock Edge Inn pub.
Protester and resident Judith Goodman, who lives next door to the pub, near Much Wenlock, said: "The development would be on an Area of Outstanding Natural Beauty, which is Wenlock Edge, and we feel the car park should not be built on. The pub sits on one side of the road and the car park on the other and there is no reason the developments could not take place on the same side the pub is."
Isobel Bushell, who also lives near to the proposed side, said the application had come as a shock.
"We actually thought the car park area belonged to the National Trust, which is also against it," she said.
The family said the new accommodation would be needed to ensure the pub remained sustainable once it reopened.
Further work would have seen the demolition of a derelict outbuilding and the installation of a sewage treatment plant on the land, which was located opposite the pub itself on the B4371.
But councillors said the new buildings were on the wrong side of the road, which separated the Area of Outstanding Natural Beauty, during yesterday's Shropshire Council south planning committee meeting.
Councillors also reacted furiously to "threats" agents were working on behalf of the applicants to immediately appeal if the plans were turned down, as well as putting in a further application to turn the Wenlock Edge Inn into a house.
Cecilia Motley, Shropshire Councillor for the Corvedale Division, said: "I feel this application has been put together pretty poorly.
"It has not been properly thought through because the accommodation blocks could be built on the same side as the pub.
"We also had representations come in that they would be appealing, which I regard as a threat.
"I still think a satisfactory conclusion could be found in this case.
"It's very important further work is done to look at putting the new units on the other side of the road.
"The accommodation would be in completely the wrong place and would strongly advise the applicant to come back with something much more sensible."
Madge Shineton, Shropshire Councillor for Cleobury Mortimer, said she was keen to see the once popular pub reopen.
"We need to remind ourselves we have stopped pubs being turned into houses," she said.
"I am in favour of diversification on this site but certainly nothing like this.
"The accommodation could go on the pub side and we could take extra steps to look at how we could eventually support such an application."
The Murray family bought the disused pub last September for an undisclosed sum.
It has been closed for some time and the family had been restoring it ready for a reopening.
The pub is in a popular location as Wenlock Edge draws thousands of walkers and climbers from all around the county and beyond.
One of the best-known local features is Ippikins Rock in a wooded section of Wenlock Edge where a steep cliff drops away to the valley below.