Kentucky Fried Chicken had planned to open the new restaurant on the site of the old Abbotsford Hotel in the centre of town.
But negotiations over the move stalled and the company has now decided to back out of the move.
Galashiels and district councillor Euan Jardine said the decision was a blow to the town’s economy and is now seeking talks with the council to consider alternative uses for the site.
Mr Jardine said: “I have reached out to KFC about the potential development of a KFC restaurant at the Abbotsford Hotel site due to the lack of progress on the site.
"I have received the news that talks have fallen through due to no real desire from owners to progress on certain terms and KFC needing to focus on more advanced projects.
"This is obviously disappointing as it is a site in a central position to serve the wider community and offer choice. I feel it is also a blow to Galashiels as a whole as it would have brought an economic boost to the town.
"It also opens up the question of what will happen to the Abbotsford Hotel. I will be speaking to Scottish Borders Council on this matter and look at what options we have going further.”
No-one from KFC was available for comment.