The American chain wanted to build its drive-thru on the site of the former Papa’s Fish and Chips building near Morrisons in Market Lane.
The plan also included a separate unit for coffee shop Costa.
Scarborough Council planning officers had recommended that the scheme should be given the green light when the authority’s planning committee met on Friday.
Councillors instead decided to defer a decision due to fears that it could lead to an increase in litter in the area and that the potential for extra traffic and congestion could cause issues on the busy A64 road.
The KFC and Costa plan involved demolishing the Papa’s building, formerly The Scarborough public house, creating 24 new jobs in the process.
North Yorkshire County Council Highways had not objected to the scheme.
Cllr John Casey proposed the deferral, citing concerns about the impact on levels of crime and anti-social behaviour in the area and also the potential for litter.
The Highways Authority is also to be asked again if it has any concerns about the plans.
Cllr Roberta Swiers said there had already been a number of “small” accidents at the entrance to the site, which also includes a McDonald’s.
Eastfield’s Cllr Theresa Norton told the meeting that would be a “huge litter issue” if the scheme went ahead.
She said: “Eastfield needs a lot of things but I’m not convinced a Costa or a KFC is among them.
“Personally I have got serious reservations.”
Cllr Norton said she did not feel the building had been empty long enough to allow another restaurant or a “community-based” business to try to bring forward an alternative scheme.
Her fellow Cllr Michael Stonehouse added: “I think it is a bit of an environmental disaster this one.”
Cllr Stonehouse said that the probable congestion the development would cause would be like having “carbon monoxide with your Costa”.
It was noted by Cllr Stewart Campbell that there was only the mention of one bin for the site in the planning application.
Discussions will now take place with the applicant to see if any changes can be made with the scheme.