Mayor Fabienne Keller informed Muslim leaders last week that the municipal subsidy also required that they preach a "French Islam", guarantee women's rights and inform City Hall about their view on whether Muslim girls should wear headscarves.
The association planning the Grand Mosque of Strasbourg rejected the demand and said it would rather forego the subsidy - amounting to 10% of the six million euro ($7.16 million) overall cost - than go along with the city's demands.
"We're not asking for charity... (we could) do without the city's help," Abd al-Rahim al-Heloui, secretary general of the mosque association, told the Dernieres Nouvelles d'Alsace daily in the eastern French city on Wednesday.
On preaching only in French, he said, "That is a theological issue; politicians have nothing to do with it."
Most of France's five million Muslims are of Arab North African origin.
Al-Heloui also bristled at the suggestion that Muslim leaders help fight juvenile delinquency, saying it implied that the mosque was in regular contact with young lawbreakers.
France launched a council of Muslim communities last year to help deal with issues such as construction subsidies, which the state offers to all recognised religions.
Paris is considering banning
headscarves from public schools
Some politicians have said they hoped Muslim leaders would return the favour by exerting their supposed influence to bring more order to the unruly suburban slums where many Muslims live.