Stormont voted last night against a proposal to fly the Union flag from Belfast City Hall all-year round.
The vote came during a marathon two-day debate at the Assembly about new legislation governing the 11 new 'super councils' set to start in shadow format from May.
The Ulster Unionist Party proposed that the Union flag should fly 365 days a year at the City Hall and at least on designated days at other council headquarters. This was voted down.
The Alliance Party proposed that all council headquarters fly the Union flag on designated days, but this was also rejected.
A decision by Belfast City Council in December 2012 to fly the flag on statutory days instead of all-year round led to months of loyalist protests and rioting.
Alliance MLA Anna Lo said the failure of the Assembly to vote for her party's motion has prevented the finding of a solution to the controversy.
"The Alliance amendment would have taken the whole flags issue off the agenda for the new councils," she said.