Real Menard, mayor of the Mercier-Hochelaga-Maisonneuve borough, told a news conference Saturday he would not grant Chaoui an operating licence to open a centre in the neighbourhood.
Chaoui, a Moroccan-born imam who has made statements deemed homophobic and sexist, had not yet applied for such a permit.
He has described Islam and democracy as "completely" incompatible.
Menard said he based the pre-emptive decision on security considerations, but added that places of worship were not permitted in the area the youth centre was planned to be established.
He added the borough council would meet to redefine what constitutes a community and cultural centre, and religious instruction would be excluded.
"The measure would freeze any demand for a certificate of occupation for a community centre," Menard said.
Reached over the phone by The Canadian Press on Saturday afternoon, Chaoui said he was too busy to comment on the situation.
Montreal Mayor Denis Coderre backed Menard's decision, saying it was an issue of public order and safety, and not freedom of expression.
Coderre described Chaoui as an "agent of radicalization and instigator of social tension."
"It could provoke things. Lone wolves can exist and that's the fruit of radicalization," Coderre said.
The mayor added he could have intervened to block Chaoui's project under city laws by arguing that it would cause "disturbances to the public order."
Coderre said the city was ready to tackle any legal challenges.
"We feel solid if ever there are legal proceedings. Our role is to govern and to make sure to have a balance between openness and vigilance," Coderre said, adding he did not want to stigmatize Montreal's Muslim community.
The case had nothing to do with religion, he said.
Coderre, who was a federal minister at the time of the Sept. 11, 2001, attacks, urged members of Parliament to adopt new anti-terrorism legislation, tabled by the federal government Friday, as soon as possible.
Bill C-51 puts forth several measures to thwart terrorist acts, including granting Canada's spy agency stronger anti-terror powers.