Plymouth planning officers concluded the plans for Drake's Island should be rejected partly because the little egrets would be disturbed and leave.
Developers Rotolok, who want to build a 25-bed hotel on the uninhabited island, said there was "no problem" with its effect on the birds.
No-one from the council was available for immediate comment.
Drake's Island, which was bought by the Tiverton-based businessman and former Plymouth Argyle chairman Dan McCauley, covers about six acres and contains military barracks and buildings from the Napoleonic era.
Mr McCauley is trying for a third time to get permission to build a Â£10m boutique hotel, bar and restaurant on the island.
Last year, plans submitted by his company Rotolok Holdings for Drake's Island in Plymouth Sound were rejected by city councillors who said more information on the risks to wildlife was needed.
Natural England has now told officers: "The little egrets have selected a roosting and breeding site distant from human activity.
"If the development were to result in disturbance, as we believe is likely even with the proposed mitigation in place, this may result in the complete loss of the breeding colony from this site and communal roost rather than a reduction in numbers of birds present."
Little Egrets
There are thought to be about 700 breeding pairs nationally and it is ranked amber on the RSPB's conservation list, as a rare breeding species.
They first arrived in the UK in 1989, and only started nesting in 1996.
Source: RSPB
Officers recommended refusal to the planning committee on 15 January citing the effect on the egrets and flooding risk.
Mr McCauley's son Aidan said: "I am staggered that after years of close working with council officers they are choosing to ignore the evidence that is before them and turn our proposed investment away.
"My professional team has provided the council with all they need to approve this existing scheme and it is clear that there is no problem with the little egrets, and no need for any off-site mitigation measures to be taken."
A colony of rare birds could thwart a multimillion-pound scheme to redevelop an island in Plymouth Sound.