Proposals for the nine large homes to be built on the site of Saltwells Nature Reserve were rejected by council officers using delegated powers.
The officers found a string of issues with the scheme.
In its rejection, Dudley Council said the development would have resulted in the loss and deterioration of ancient woodland and the overall scale of the site failed to ‘respond positively to local character’.
A major campaign was launched to combat the application, with thousands getting involved to submit objections and voice opposition to the plans.
The Save Our Saltwells group saw more than 10,000 people join a Facebook group and hundreds regularly gathering to protest and collect signatures.
Lesley Dunn, campaign spokeswoman, said the group were overjoyed at the news and said they were looking forward to the next steps.
She said: “We are so grateful for all the support from users of the wood, for all the 10,000 members of the Facebook group, for all the people that took time to sign the petitions, for everybody that took the time to put in objections.
"So many people have been involved in this and it really shows what people can do.
"It has been a very positive campaign, there has not been any council bashing and people from different political persuasions worked together – we are looking forward to the next step now.”
Councillor Keiran Casey, cabinet member for regeneration, said: “We have listened to the concerns of local people, assessed the application against a range of criteria and have taken the decision to reject this on a number of grounds.
“The overarching concerns were about the impact of such a development on the ecology and biodiversity of Saltwells Nature Reserve, the impact of a development on important habitats, protected species and ancient woodland as well as the dominance such a large development would have on this scenic setting.
"We also felt that the development would negatively impact the historic integrity of the site and its role as an important heritage asset.
"We are very grateful to local people for taking the time to share their concerns and engage in this process.
"I think one of the main things that stands out for me as a result of this campaign is the great way in which the community and local councillors have worked together to raise this issue, showing just how much local people value the open spaces that we have in the borough and are now actually looking at what more can be done to enhance the Nature Reserve at Saltwells."