Anglesey, Wales has lost its bid to stage the Island Games in 2009 and its only rival Aland of Finland was backed by the games' association 33 to 21 during the vote taken in the Shetlands currently hosting the competition.
Leading Councillor Derlwyn Hughes said it was "desperately disappointing".
"We were confident in the strength of our bid, but Ãâ€Â¦land obviously had the upper hand in terms of existing sporting facilities."
The support for Aland came as a particular blow after the association's executive committee had endorsed Anglesey, which has taken part in the games since the bi-annual event started in 1985, but has never played host, unlike Aland, which won in 2001.
The Island games have been staged every two years since they began in 1985. This year's tournament in Scotland has seen competitors from as far as the Falkland Islands and Rhodes.
Mr Hughes said: "Our deputation worked extremely hard after arriving at the Shetland islands to sell the strengths of our bid but it was not to be. We will now take stock of the recommendations made by the IIGA (International Island Games Association), and try to learn from them should we decide to make another bid sometime in the future".
Mr Hughes said one million pounds would still go into upgrading Anglesey leisure centers even though the island had lost.
Gareth Winston Roberts, who holds the council's economic development portfolio, said: "Securing the Island Games for Ynys MÃÂÂ'n was as important for us, as London winning its bid to host the 2012 Olympics.
"The event would have attracted thousands of athletes and supporters to the Island, bringing with them huge economic benefits".
Aland, which previously hosted the games in 1991, had campaigned for the event to be held outside the British Isles, following the Shetland games and the games in Guernsey in 2003. It also boasted that its swimming and athletics facilities were better than those on Anglesey.
Aland is an independent region of Finland although Swedish is its main language. The population totals 27,000 with 10,700 living in the only town of Mariehamn.
A province of more than 6,500 islands and skerries it's two hours by ferry from Sweden and five from Finland.
A regular visitor is tennis legend Bjorn Borg, who appeared on a recent set of Aland postage stamps.
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