Lane Cove Council considered plans for a three-storey data centre right at the edge of an industrial zone.
The 21,000sq m, 81MW facility - dubbed Project Mars - would have backed onto bushland and a residential neighbourhood.
Some locals, including community groups and councillors, heavily opposed the construction.
Developer Goodman said the policy and regulatory environment had evolved significantly since planning began in March 2025.
"Goodman has carefully considered these changes together with feedback received through the planning process, including the views of the local community," the company said.
Local concerns had been raised over the potential light and noise pollution, and the impact on services for residents.
The council's bush management committee also identified problems for plants and wildlife.
The serious concerns were significantly compounded by the potential for more data centres along Mars Road, it said.
Three other data centres already exist in or are proposed for Lane Cove West.
Utility providers similarly raised fears the development would strain infrastructure.
Sydney Water previously submitted the existing drinking water systems had limited ability to serve the project.
Goodman anticipated it would need constant supply of drinking water for cooling, with Project Mars requiring an estimated 1.4 million litres per day.
Online, locals and some councillors celebrated the company's decision to withdraw its application on Monday.
Goodman's general manager Ben McGilp also faced pressure to drop the proposal during a recent Senate inquiry into artificial intelligence.
Liberal frontbencher Sarah Henderson said the project - about 20m from the closest house - was "wholly unreasonable".
Project Mars was "frankly a grossly irresponsible proposal which shows contempt for local residents", she said during the inquiry hearing.
The Department of Industry, Science and Resources said it welcomed "responsible investment" in AI and data centres, adding Goodman did not identify commonwealth policies as a reason for its decision.
"Goodman has publicly stated that its decision to withdraw Project Mars reflected a range of factors, including changes in the policy and regulatory environment and feedback received through the planning process," the department said.
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