The scaled-back proposal from the Hamilton Community Indoor Recreation Centre for a new three-court indoor facility was rejected because the council didn't have $2 million for capital costs and $100,000 for an annual operating grant.
Councillors said it was disappointing because there was a desperate need for indoor sporting facilities but they were "broke".
The YMCA on Pembroke St will also be put on the block but in a tight 7-6 vote it was decided to sell the three titles, valued at between $2 million and $3 million, to buyers for recreational and related purposes only.
Councillor Dave Macpherson said it would be "unwise" to sell to anyone as it would lead to a reduction in the city's indoor courts.
"It flies in the face of advice ... that we need more space not less," said Mr Macpherson.
However, the city's three pensioner housing blocks deemed "not fit for purpose" will be sold on the open market to get the best price.
Hamilton Mayor Julie Hardaker supported the decision to sell the Johnson St, Ascot Reid Ryan and River Rd flats to the highest bidder but the council would also consider interest from sympathetic buyers.
Councillor Roger Hennebry argued the council wouldn't spend $40,000 to $50,000 a year on providing aged housing but supported spending a combined $13 million topping up Claudelands Event Centre and the Waikato Stadium in the next few years.
Meanwhile, the council voted unanimously to retain its remaining 21 pensioner housing complexes and work with the church groups and social agencies who lobbied the council not to sell them.
THE PLAN
What's in
* Gully restoration programme - $45,000.
* Investigate repairs needed at Hamilton Municipal Pool - $50,000.
* Remaining 21 pensioner housing blocks to be retained.
What's out
* Hamilton Indoor Community Recreation Centre - saving $2 million plus $100,000 a year operating costs.
* Upgrade to the Hamilton Municipal Pool to comply with water standards - saving $475,000.
* Johnson St, Ascot Reid Ryan and River Rd flats to be sold to highest bidder - saving estimated $3 million.
* YMCA on Pembroke St to be sold for recreation and associated use - saving estimated $3 million.
Still to be debated
* Removing fluoride from the city water - saving $45,000 a year.