Natural Resources Wales has refused Powys Council's environmental permit application for its waste bulking facility in Abermule.
The environment body said there were concerns about fire safety at the site following a technical assessment.
Natural Resources Wales (NRW) said "insufficient water supplies available" could result in a “significant” fire, adding that they believe the risk of environmental impact is "unacceptable".
"There is an unacceptably high risk that there would not be a sufficient amount of water available at the proposed facility during a fire, which could then lead to considerable environmental issues to the immediate and surrounding area," NRW told the council.
They added: "We are also not satisfied that the applicant has considered the impact on odour emissions if food waste is stored for longer than 24 hours outside of normal operations."
The council applied for a permit to operate a new facility for the bulking of up to 22,500 tonnes a year of non-hazardous material from kerbside collections across Montgomeryshire. The waste is then transferred to processors to be recycled into new products.
Powys Council can appeal the decision to refuse the permit application within six months of the notice of refusal.
NRW said requests for information were made to address the concerns and the council responded with more information after each request.
However, NRW said the substance of the responses was deemed "insufficient" after further assessment by the permitting officers, who consulted with the Mid and West Wales Fire and Rescue Service.
Ann Weedy, NRW’s Operation Manager for mid Wales said: “Permit applications for developments such as the proposed bulking site at Abermule are complicated and often divide opinions. This is why undertaking a thorough consultation process is crucial to ensure all views and feedback shared are considered.
“I would like to thank everyone who responded to our public consultation and to our professional partners who provided their specialist advice. I would also like to thank the NRW officers who diligently assessed every aspect of the application and the feedback before coming to a determination on the application.”
Powys Council can also submit a new permit application.
There are currently two other similar sites under Natural Resources Wales Environmental Permits in Brecon and Rhayader.
The council has said that the facility near Newtown is needed so it can hit Welsh Government recycling targets.
Comments: Our rules
We want our comments to be a lively and valuable part of our community - a place where readers can debate and engage with the most important local issues. The ability to comment on our stories is a privilege, not a right, however, and that privilege may be withdrawn if it is abused or misused.
Please report any comments that break our rules.
Read the rules here