Newlyn's newly created harbour board voted to abandon the £5 million scheme at a meeting on Friday by just one vote – seven in favour and six against.
The decision came after one of the country's biggest fishing fleets, Newlyn-based W Stevenson and Sons, warned a public meeting earlier in the week that it would not land fish at the new market if it was not "a viable option".
In a statement, the Newlyn Pier and Harbour Commissioners described the move as "bold", pledging to drive forward the regeneration of the harbour "as a matter of urgency".
Gilbert McCabe, chairman of the commissioners, explained that the current proposal had "far less support from the fishing industry" than the public.
He said the commission was now free from ties to a specific building and could "move forward at pace", on a long-term business plan with "benefits for all stakeholders".
"This will make clear how we will deliver a fit-for-purpose market and other community and stakeholder benefits from a position of strength," Mr McCabe added. "It will also secure a viable future for the fishing industry and all its dependants by seeking to run a successful harbour and market." Paul Trebilcock, managing director of the Cornish Fish Producers' Organisation, said struggling boat owners feared additional costs.
"We want to see improvements but the majority of boat owners have not been convinced," he said.
"We want a fit-for-purpose building with proper facilities and that's as far as we want to go – I just hope this (decision) doesn't mean that nothing will happen."
The new commission, which was appointed nine weeks ago, declined offers of grants from the European Fisheries Fund for £2.3 million and £940,000 from the European Regional Development Fund.
A loan from Cornwall Council will also be declined after financial specialists performed a "health check" on the commission's finances and assets.
The statement explained: "We have determined that at this point we are not in a sufficiently strong position to commit to loan repayments over a period of 15 years. That would tie our assets into that loan, leaving us little room to run the harbour as successfully as possible or to address our other responsibilities."
The intention is to publish a "more coherent and financially sustainable business plan" by Christmas.
Newlyn resident Mary Saunders said it was "a sad day", adding that locals would be "disappointed".
"This has been going on for years and years but some people just don't want any change," she said.
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