Causeway Coast and Glens councillors have voted against flying the rainbow flag from the borough council's headquarters during this summer's Foyle Pride festival.
The motion - put forward by Sinn Fein - was defeated by 17 votes to 15. A similar motion was blocked last August after the DUP used a procedural motion to 'call-in' the decision for legal advice.
Sinn Fein's Cara McShane said the decision "exposes this council as a cold house for diversity".
"It effectively slammed the door on equality and inclusion," she said.
"We will be bringing this back for further consideration."
The motion to fly the flag was backed by Sinn Fein, the SDLP and Alliance, while it was rejected by the DUP and PUP. The UUP vote was split.
PUP councillor Russell Watton explained he voted against the motion due to the "precedent it would set" and emphasised that he has "no issue" with the LGBT community.
He added: "There are a lot of anniversaries and events coming up over the next couple of years. My problem is where does it end if we put a flag up for one?"