The city of Zurich has voted against giving a financial credit of SFr50 million ($30 million) to the new national carrier, swiss.
Although ballot turnout was disappointing at only 24 per cent, more than half - 51.8 per cent - voted against the credit.
The "no" vote means that swiss, which was launched last Sunday, has lost its third biggest public shareholder.
Peter Gutknecht, a spokesman for swiss, said the company was disappointed with the outcome but that it was "understandable".
Gutknecht explained that it may well have been "too much" to ask Zurich City voters to grant funds for the third time, given that the federal and cantonal coffers have already given swiss SFr900 million.
The federal authorities and the canton of Zurich have already contributed SFr600 million and SFr300 million respectively.
The new airline, which was built around the regional carrier, Crossair, and parts of the collapsed Swissair, has a capital of just over SFr3 billion.
Under a plan agreed last October, corporate sponsors are expected to take nearly two thirds of the shares in swiss, while the federal, cantonal and local authorities take the remaining third.
In the run-up to the vote, the city's main political parties were divided over the issue. The arguments mirrored the concerns of earlier debates at cantonal and federal levels.
Supporters of the credit package - the Social Democratic Party, the Radicals and the Christian Democratic Party - argued that Zurich would benefit economically from the airline.
They said thousands of jobs around the city depended on the nearby airport and on a financially sound national airline. Supporters also said a yes-vote would be seen as a gesture of solidarity towards other public sponsors.
But opponents, led by the right wing Swiss People's Party and left wing groups, argued that the local authorities should not get involved in a purely commercial enterprise.
They considered the business plan for the national airline too risky, saying taking a stake in swiss would put an additional strain on the city's finances.
The no-vote on Sunday sends out a mixed signal to more than half of Switzerland's 26 cantons, who are yet to decide on whether to financially support the new airline. So far, three cantons have refused to take a stake in swiss.
Others have only approved reduced contributions. Even in a best-case scenario public sponsorship funds will fall more than SFr20 million short of the target of just over SFr1 billion originally set.
Before the vote, a spokesman for the national airline said the local vote in Zurich was important, but not crucial for swiss.
"From a strictly financial point of view we do not need the 50 million credit from the city of Zurich," spokesman Patrick Jeandrain told swissinfo. "But the funds are important because they would provide us with more financial means."
The airline, which recently entered into an association with American Airlines, operates a fleet of 130 aircraft and serves more than 120 destinations in Europe, Africa, Asia, and the Americas.
swissinfo with agencies