A deal to repeal North Carolina's so-called "bathroom bill" collapsed on Wednesday, as each side accused the other of broken promises.
The law limits protections for lesbian, gay, bisexual and transgender (LGBT) people.
Businesses, entertainers and sports teams have boycotted North Carolina over the controversial bill.
But state legislators were unable to reach agreement after late additions were made to the proposed deal.
The law, known as HB2, was introduced in response to an ordinance from the city of Charlotte, which would have afforded extensive protections to LGBT people.
HB2 placed limits on this, particularly by requiring transgender people to use toilets that correspond to the sex listed on their birth certificates.
A compromise deal was announced several days ago, when Charlotte agreed to repeal its ordinance and the Republican-dominated senate agreed to repeal HB2 - effectively a "reset" of the entire controversy.
The city of Charlotte went ahead and voted to reverse its ordinance. The senate's repeal of HB2, however, never materialised.
Republicans added a provision on Wednesday which included a ban for several months on cities passing any similar ordinances to grant protections to the LGBT community.
"This wasn't the deal," said Senator Jeff Jackson, a Charlotte Democrat. "This bill breaks this deal. Charlotte would have not repealed its ordinance if this was the deal."
North Carolina's legislature is deeply divided. Last week, the Republican-controlled legislature took unprecedented steps to strip powers from the Democrat governor-elect following his election victory.
"The legislature had a chance to do the right thing for North Carolina, and they failed,'' Governor-elect Roy Cooper said. "This was our best chance. It cannot be our last chance."
The political fallout from HB2 was enormous, costing the state millions of dollars.
The National Basketball Association (NBA) moved its all-star game to another state, Bruce Springsteen and others cancelled concerts there, and PayPal dropped expansion plans, costing the state 400 jobs. The US Justice Department has taken legal action against North Carolina over the bill.
The controversy over bathroom rights became a national talking point, and is widely seen as having cost outgoing Republican Governor Pat McCrory his post.
Governor McCrory issued his own statement on the day's proceedings, which he said were about "a manufactured political issue".
"This was at least the third time that pressure from the left sabotaged bipartisan good faith agreements for political purposes," he said.
"As I've stated multiple times, the balance between privacy and equality is not just a North Carolina issue, it is a national issue that will be resolved by the US Supreme Court in the near future."
But the American Civil Liberties Union (ACLU) said lawmakers were "refusing to clean up the mess they made".
"The legislature may not be willing to undo their unconstitutional overreach and respect the rights of LGBT people, so we'll just have to see them in court," the group said in a statement.