The move came as a surprise to Bleskacheck and her lawyer, who thought the terms for her exit from the chief position would be acceptable to city officials.
Mayor R.T. Rybak says the city will continue to pursue her removal as chief. Neither Mayor Rybak nor members of the committee would say why the offer was rejected. The executive committee has scheduled another meeting on the matter for December.
Bleskachek, the nation's first openly lesbian big-city fire chief, was the subject of several firefighter lawsuits accusing her of harassment and discrimination.
Rybak had announced the agreement in a letter to the city's executive council in which he wrote that he no longer had confidence in Bleskachek as chief.
Blesachek's attorney, Jerry Burg, said the chief's employment agreement calls for her to be reassigned as battalion chief. She would then request a demotion to captain, he said.
Bleskachek, 43, was hailed as a trailblazer when she was promoted to the top job two years ago, but her tenure has been troubled.
Three female firefighters have sued, alleging various acts of discrimination and sexual harassment. Two of the lawsuits were settled, but earlier this month, a male firefighter brought another lawsuit alleging he was denied advancement because he is male and not gay.
A city investigation is still under way. This summer, a separate investigation by the city's Department of Civil Rights into a 2003 complaint by a male firefighter - brought when Bleskachek was a battalion chief - found it "likely" that the department gave preferential treatment to lesbians or those who socialized with them.
The city has spent more than $410,000 on the investigation, legal settlements and compensation of Bleskachek during her paid leave, which began March 22.
(The Associated Press contributed to this report)