Marske bypass will not be made into a dual carriageway, despite a 25-year campaign for the upgrade.
Although only one carriageway has been built, the road was designated as a dual carriageway, and Redcar and Cleveland Borough Council needed a court order to stop the other carriageway being built.
The council said it felt it was not necessary to develop the dual carriageway because of local and national policy changes, and sought permission to sell the verge of land, near Redcar's new Ings and Mickledales estates, to housing developers.
Saltburn, Marske and New Marske Parish Council objected to the plans to drop the upgrade scheme.
Councillor Jim Wingham said a bypass for Marske was first discussed 25 years ago because of rising traffic levels.
However, after two hours of deliberation, Teesside magistrates came down on the side of the borough council, and sanctioned the sell-off.
The council now plans to sell the land to Bellway Homes and Yuill, which said they intend to use it for estate landscaping.
Coun Wingham said he feared more houses would be built on the strip of land.
He said: "The chances of ever getting a new carriageway are gone now. We have always objected to the housing developments because we feel it is an encroachment of the separate identities of our three communities."
He said the dual carriageway would have provided easier access to isolated east Cleveland.
"I am very disappointed, but I expected it. Redcar and Cleveland is a very determined steam roller and a parish council is only a small organisation - unfortunately, Goliath won."
However, a spokesman for the borough council said: "We are pleased with the court's decision. We put forward a case to close the land and they agreed with us."
He said the local structure plan identified the need for more housing in the Marske and Redcar area, but emphasised the borough council would still have control over applications for the site.
A spokesman for Bellway Homes catagorically denied the land would be used for housing and said: "All we are planning to do is to landscape it and put trees there."
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