A proposal to change the status of Crossmaglen from a town to a village "has the potential to damage the town long term and hinder future infrastructure development".
Plans to reclassify the town were revealed at Newry, Mourne and Down District Council's Strategy, Policy and Resources (SPR) Committee as part of the Local Development Plan.
It also included details on proposed changes for other locations including downgrading Newtownhamilton to a village, upgrading Bessbrook to a town and keeping Warrenpoint as a town but making Burren a village.
However, SDLP councillor Pete Byrne proposed that Crossmaglen should retain its town status, a move which was supported by other committee members.
The SDLP representative's proposal must now be ratified at next month's full council meeting.
Councillor Byrne said in relation to Crossmaglen: "In the face of Brexit, this reclassification has the potential to damage the town long term and hinder future infrastructure development."
"In the document it states although some settlements like Crossmaglen have a significant number of services like a health care centre, fire station and local library, its population of only 1,608 does not justify it being classified as a small town," he told the Newry Democrat.
"However, it later states that populations should not dictate the classification alone but take into consideration the range of facilities provided and the ability to serve the wider area.
He added: "Without its town status Crossmaglen would not have benefited from developments like the Cross Square Hotel, Casey's Supermarket and the state of the art credit union".
Sinn Fein's Slieve Gullion Councillor Terry Hearty branded the plan "ridiculous" adding that it "will not happen".
"The committee that discussed the issue accept that, and I fully expect the full council to pass our recommendation that there will be no change to the town status," he said.
Newry, Mourne and Down District Council said the committee had "considered a series of papers designed to provide the evidence base for preparing the Local Development Plan. The latest paper dealt with the strategic settlement hierarchy.
"The paper presented to the committee represented the next stage in that process. In total, 12 settlements were identified as being worthy of consideration for reclassification.
"The exercise also identified other locations for consideration as potential new small settlements.
"The report to the SPR Committee was designed to inform councillors. Councillors were not being asked to make a decision in relation to the reclassification of any of the 12 settlements identified."
