The council had previously decided against the rezoning but, at this week's meeting, it agreed by a 6-3 majority to change the zoning of the Ross Road site from 'amenity' to 'residential'. A planning application is now expected to be lodged for 12 houses on the site.
Mayor of Killarney Michael Courtney strongly opposed the rezoning, claiming the McShain family had already got their 'pound of flesh' out of Killarney and had been granted planning on other parts of their property.
In return for a change in the zoning, Sister Pauline McShain has offered to donate 14 acres to the State for incorporation into Killarney National Park. The 14 acres would also act as a buffer zone between all developments and historic Ross Castle.
The Killarney Nature Conservation Group said they would appeal the decision to An Bord Pleanála.
"Our policy is that there must always be a buffer zone around the national park but, once you rezone, there are no guarantees," chairperson Rose Barnes said.
"I would also be critical of the town council in that they all agree to a development plan and then want to start rezoning. There could be a precedent here for changing the zoning of other high amenity areas in Killarney," she added.
Group members as well as some residents of the Ross Road, who are also objecting to the development, were in the council chamber when the rezoning was debated on Monday night.
At the previous meeting, Mr Courtney ruled a rezoning proposal out of order, but accepted a proposal which was signed by the requisite five councillors Pat F O'Connor, FF; Sean Counihan, Labour; Sheila Dickson, FF; Patrick O'Donoghue, FF, and Sheila Casey, FG.
Cllr O'Connor said the proposal was consistent with the proper planning and development of the area and allowed for low-density housing, not exceeding 2.5 houses per acre.
He also said that the 14 acres to be donated would provide an "absolute" buffer zone for the national park. He also believed the proposal would allow for the refurbishment of Reen Cottage.
"We also submit that the proposal does not provide for the automatic development of the area. Any proposed development will have to meet with the approval of the planning officials and will be governed by strict planning considerations," Cllr O'Connor said.
Stressing that he was not 'anti-McShain', Mr Courtney asked that files relating to dealings with the family be made available to all councillors. He claimed that rezoning of the McShain site was development-driven and was not something the McShain family wanted for its own private use.
Meanwhile, details of the proposed rezoning are to be put on public display for four weeks before coming back to the council for a final decision.