The first-floor venue in Grimston Street dates from 1912 and was once part of the neighbouring Young People's Institute complex.
It was converted into a ballroom in the 1930s but since the recent conversion of the main YPI building in George Street into flats, it has been empty.
Developers Lakeland Properties had put forward proposals to convert the premises into ten self-contained apartments.
But the city council's planning committee this week refused approval for the conversion scheme.
Councillors claimed the scheme would neither preserve or enhance the grade two listed building or the surrounding conservation area.
Councillor Rilba Jones, who represents the area, said: "I think there might be a much better plan to fit the bill."
Councillor Steve Baker also raised concerns over access to the first-floor flats.
Developer Ben Hooson had said the proposals would respect the historic nature of the old theatre building.