Chichester City Council made plans to install five double glazed windows and three doors in the portico of the North Street site.
The Grade II* listed building was built in 1731 and it was hoped that enclosing the front area would create a 'flexible indoor space' for a variety of uses and stop homeless people from using it as shelter.
In its letter of withdrawal, the city council said it would reconsider the 'design principles' and that a new application would be submitted in the future.
Mayor of Chichester, Richard Plowman said: "This is too good an opportunity to miss to create a new community space but we need to work with the community on the design to make it acceptable for everybody."
The Chichester Society registered its objection to the application and listing its reasons: "This space is too important a part of the public realm to be lost as an unencumbered covered meeting place.
"The entrance space with its open arcade is a fundamental element in the composition of this Grade II* building.
"The loss of historic fabric such as the replacement of the paving.
"The proposed use is not made clear in this application and therefor the benefit cannot be assessed.
"The problem of rough sleepers in the city has, it seems, been successfully dealt with by the provision of care and accommodation."
Another objection came from Mr Mike White, who described the city council's vision for the portico as an 'appalling significant alteration'.
He said: "I strongly object to this appalling significant alteration to the form and function of the rare, if not unique, ground level undercroft which is virtually as built nearly 300 year ago as a public open space/covered entry to the council house.
"It is a major part of the street scene, with the portico which it supports of the listed Grade II* Council House.
"No application for alteration should be made, let alone considered until a very strong, overbearing, publicly declared and publicly debated case is made before any application is made by the guardians, for the public, of this building.
"The council tax payers who are paying for this are part of the public."
Donna Ockenden also objected to the plans and said: "I completely oppose this application. The council house is a Grade II* listed building and the proposal to add windows and doors to it - thus shutting off the portico is completely out of keeping with such a historical building.
"This is also a significant waste of public funds and there is no valid rationale for this application."