Denton City Council members voted down the petition 5-2 after eight hours of public testimony, sending the proposal to a public ballot in November.
Fracking involves blasting a mix of water, sand and chemicals deep into underground rock formations to release trapped oil and gas. While the method has long stirred concerns about its effects on the environment and human health, industry proponents argue that fracking can be done safely and is cleaner than other forms of energy extraction.
Industry groups and state regulators warned such a ban could be followed by litigation and a severe hit to Denton's economy.
Barry Smitherman, chairman of the Railroad Commission, the Texas oil and gas regulator, said in a letter addressed to Denton's mayor and city council last week that a fracking ban in Denton would "increase America's dependence" on foreign oil and natural gas.
Tom Phillips, a former chief justice of the Texas Supreme Court, representing the powerful Texas Oil and Gas Association, testified that some of its thousands of members would "undoubtedly sue" if the ban eventually passed.
But organizers of the citizen-led petition that — with about 1,900 voter signatures — forced the council to Wednesday's vote, said they proposed the ban as a last resort after fracking operators defied city rules, particularly ones governing setbacks and flarings.
"If the industry had approached anything near reasonableness" in accepting the rules, activists would not have demanded the ban, said Sharon Wilson of the environmental non-profit Earthworks.
In making a motion to approve the ban, Councilman Kevin Roden argued the "bold move" would force industry to come up with solutions to satisfy citizens' concerns. The motion, however, was not seconded.
The threats of litigation appeared to colour how some of the Denton council members voted. Councilman Greg Johnson voiced concerns that lawsuits from the state and from mineral holders could bankrupt the city.
An estimated 500 people turned out to Denton City Hall Tuesday, spilling over into satellite rooms and even a city building across the street. More than 100 people registered to speak during the hearing before the vote.
Among them was Riley Briggs, an 11-year-old Boy Scout, who said he no longer visited a city park after gas wells were installed across the street.
Other petition supporters, some who tearfully addressed the council, said the risks to human health and the environment outweigh the economic benefits.
Denton sits on the Barnett Shale, which is believed to hold one of the largest natural gas reserves in the U.S.
City leaders introduced a temporary ban on new fracking permits in May after fracking-ban proponents delivered a petition containing about 2,000 signatures.
The temporary ban is set to expire in September.