The Dunedin Centre subcommittee - comprising Mayor Peter Chin and five city councillors - instead backed an "alternative option without atrium" as the preferred vision for the $45.4 million project.
Only Cr Bill Acklin voted against the recommendation, which will now be considered by the council's economic development committee on October 14, before a final vote at a full council meeting on November 3.
The new plan encompasses refurbishment and development of the Glenroy Auditorium, Dunedin Centre and Municipal Chambers, creating heritage conference facilities to attract large groups to the city.
Staged construction would allow any decision to build the Harrop St atrium to be deferred and, it was hoped, keep the project within the existing $45.4 million budget.
Adding the atrium - now or later - would drive costs up to an estimated $50 million.
Judith Medlicott, founder of the Hands off Harrop anti-atrium protest group, said following yesterday's meeting she was "very pleased" with the subcommittee's decision.
"Hands off Harrop will still stay incorporated and very much alive for quite a while yet, but let's just say there's a bottle of bubbly in the office fridge," Mrs Medlicott said.
Mr Chin told yesterday's meeting he "could live with" the recommendation, although it was not his preferred outcome.
"My preferred choice was the alternative with atrium," he said.
"I have a vain hope that maybe within my lifetime . . . the atrium may perhaps happen, because I think we are going to need that some time."
Subcommittee members backed the plan over three previously identified options for the town hall development.
One involved spending $22 million to bring the building up to minimum regulatory standards.
The second - known as option 13 - had the glass atrium abandoned and the Glenroy Auditorium, Municipal Chambers and town hall basement area developed at a cost of $48 million.
The third - option 14 - was for construction of a smaller glass atrium and foyer improvements, costing $46 million, while plans for the Glenroy Auditorium and Municipal Chambers were shelved.
Mr Chin said excavating under the Town Hall "scared" him, because of potential stability issues and "what might be involved ultimately" if historic finds were unearthed.
Cr Acklin was "disappointed" basement excavation was not supported, believing structural issues could be resolved and an underground space with lower ceilings would provide superior acoustics for musicians and speakers.
Mrs Medlicott believed the atrium-free development would create a true "heritage experience" for conference delegates and other users, while protecting Harrop St's streetscape and views.
"It looks a bit like a win-win and we are all smiling at the moment," she said.
However, she still wanted design changes for the proposed new Moray Pl entrance, and was concerned councillors wanted to extend the existing Harrop St designation to allow for the possibility of the atrium being built at a later date.
The subcommittee has also recommended extending the existing Harrop St designation and reconsidering uses of Harrop St, as well as technical infrastructure issues identified by consultants' reports.
