Last month, the council granted retention for five modifications which had been made to Mr Flatley's Castlehyde House home without planning permission including the building of a garage extension, a swimming pool and a clock tower.
But the council refused permission for the retention of a gym and two decorative limestone-finished ponds.
"There have been so many incorrect details in the media in recent weeks and we want to clarify the situation," said a council spokeswoman.
She said the council had to ensure that all the original features of listed buildings like Castlehyde House were preserved.
"Pre-planning discussions with the council's planning department are essential. This did not happen in this particular case. Indeed the works were carried out without the grant of planning permission and came before the council only by way of application for retention."
The council emphasised that it was willing to discuss the provision of a gym with Mr Flatley. It has sent a letter to him on the subject but has so far received no response.
Work on the Castlehyde House site has been stopped and Mr Flatley is awaiting the results of an appeal to An Bord Pleanala. A decision is expected on April 7.
Mr Flatley is currently in Barbados, where is he planning to build a house on the €25m site on Sandy Row he bought last week.
"Michael was the first to recognise the integrity of Castlehyde House and he has painstakingly restored it at huge cost.
"It is a huge project and it is not like extending a house - there is a continuous re-evaluation of the project as it goes along," said his spokeswoman Geraldine Roche.
She added that the council now appeared to recognise that the only outstanding issue was the retention of the two landscaped ponds.
Mr Flatley bought Castlehyde House, which sits on the banks of the River Blackwater in Fermoy, for £3m in 1999. It is the ancestral home of the first Irish president Douglas Hyde and is regarded as one of the finest examples of Georgian architecture in the south-west.
Mr Flatley has spent €30m since on the restoration works. The house has 14 bedrooms, a 20-seat private cinema, a spa, two climate-controlled wine cellars, and a three-storey library.
Locals in Fermoy believe the council planners are not taking the wider issues into account, according to the town mayor.
"The planning legislation was introduced for the betterment of the common good and Michael Flatley is serving the common good by investing €30m in Castlehyde House. The place would still be in ruins without him," said Councillor Tadhg O'Donovan.
He described Michael Flatley as the "best ambassador Fermoy ever had" and cited his donations to the community hospital and his visits to local pubs.