Plans to build a "monster incinerator" near the Nissan car factory, in Washington, have been rejected.
The proposals for the waste energy plant at Hillthorn Farm had been opposed by thousands of residents.
Sunderland City Council's planning and highways committee voted against it on Friday at a meeting held at the Stadium of Light.
The firm behind the application, Rolton Kilbride, said it was "very disappointed" with the decision.
Committee members said the application conflicted with the authority's draft Core Strategy and Development Plan, which is awaiting government approval.
A report to councillors had warned it was potentially too close to a disused rail line earmarked as a possible route for the Metro extension.
Campaigners said they feared it would release dangerous emissions, attract vermin and be noisy.
Speaking at the meeting, Washington and Sunderland West MP Sharon Hodgson said: "My residents live cheek-by-jowl with Washington's industry.
"However, communities feel they're becoming victims of Washington's success.
"The people of Washington do not want this built near where we live and work and some communities already suffer because of nearby industry."
The MP also said she thought the plans stood a good chance of being rejected a second time if the decision was appealed, the Local Democracy Reporting Service said.
The plant was set to operate continuously, seven days a week, processing up to 215,000 tonnes of non-hazardous municipal, commercial and industrial waste every year.
Electricity would be generated by "gasification", with high temperatures used to break down waste without combustion.
Rolton Kilbride had previously called it '"tried and tested" technology used for decades in other countries.
Following the rejection, a spokeswoman said: "The proposed facility would have provided many distinct benefits to the local economy, as well as the wider North East region.
"We will be reviewing all available options in due course."