The Waikato Regional Council will now be forced to make the final decision on the multi-agency Rail Working Group's proposal to run a two-year trial comprising one return peak service and one off-peak return service five days a week at an operating cost of $1.97 million a year.
The regional council put off making a final decision until after it had received feedback from funding agencies.
Yesterday's decision is the latest blow for the train proposal which has gained wide public support including a petition of more than 11,500 signatures presented to the council in 2009.
It also became a campaign issue at last year's local body election, when nine councillors and the mayor supported it.
Campaign for Better Transport spokesman Cameron Pitches, who has led the campaign for the commuter train, was disappointed but said the train being unable to go into Britomart was a big hurdle.
"All we were after was a trial service for a couple of years."
With Waipa and Waikato district councils already opposing the proposal, the proposed Hamilton rate would rise from $16.63 to $22.73 per property.
Councillor Ewan Wilson's "middle ground" suggestion also responded to Mr Macpherson's concerns about using $265,000 already retrieved from ratepayers for the rail as being illegal by proposed that it be ring-fenced it so it could be used only for rail infrastructure.
The council compromised and voted 7-4 to keep the project on the unfunded section in its long-term plan.
Mr Wilson said by having it in the long-term plan the community would still have a chance to make submissions.
The city council supported the concept, but did not think it was a priority when it was making cuts to the rest of its budget.
Councillors would have preferred the journey time to be less than two hours and 20 minutes and terminating at Britomart instead of the "deserted" Strand Train Station in Parnell.
Councillor John Gower said he thought the timing was wrong.
Councillor Dave Macpherson's attempts to push the service through failed when only four of the 11 councillors present supported it.