The plan also included the demolition of the mill and the construction of 15 “aparthotel” suites, restaurants, a bar and lounge, and 44 apartments in a separate four-storey block.
The council’s approval was appealed to An Bord Pleanala by An Taisce and local residents.
The board said that the site, on an inside bend of the River Suir, was of unique sensitivity and national importance because of its proximity to Cahir Castle and its position in an architectural conservation area.
It ruled that the proposed development would adversely affect the settings of the castle and the character of the conservation area because of the excessive height, scale and bulk of the hotel.
It would “fail to achieve an appropriate scale in relation to the castle”, the board said.