Mayor Vincent C. Gray vetoed legislation Thursday that would force the District’s largest retailers to pay their workers significantly more, choosing the potential for jobs and development at home over joining a national fight against low-wage work.

Gray’s quandary is playing out in many U.S. cities, where local leaders who generally sympathize with worker causes are also eager to lure jobs and commerce for their constituents. Retailers, most notably Wal-Mart, have placed an increasing focus on urban expansion, while unions and advocates for workers have pushed measures like the District’s “living wage” bill as a valuable hedge against the proliferation of low-paying jobs.

The veto, which is unlikely to be overridden by the D.C. Council, clears the way for Wal-Mart to continue its entry into the District — plans years in the making that were thrown into question after lawmakers embraced the wage proposal this year.

Gray (D) announced his veto in a letter delivered to Council Chairman Phil Mendelson on Thursday morning. It explained his opposition to the bill and tried to soften the political consequences by disclosing his intention to seek a minimum-wage increase from all employers, not just large retailers.

In the letter, Gray said the measure was “not a true living-wage bill,” because its effect would be limited to “a small fraction of the District’s workforce.” He called the bill a “job-killer,” citing threats from Wal-Mart and other retailers that they would not locate in the city if the bill becomes law.

“If I were to sign this bill into law, it would do nothing but hinder our ability to create jobs, drive away retailers, and set us back on the path to prosperity for all,” he said.

In an interview, Gray did not say what minimum wage he would seek, except that any increase would be “reasonable” and would come after consultation with lawmakers and interested parties.

Mendelson, who shepherded the bill through the council after introducing similar bills for years to no avail, said he was disappointed by the mayor’s decision. “The issue is, do we want to attract low-paying jobs?” he said. “We want decent jobs that pay decent wages so our residents can afford to live in the District of Columbia.”

The bill, known as the Large Retailer Accountability Act, would require retailers with corporate sales of $1 billion or more and operating District stores of at least 75,000 square feet to pay their employees a “living wage” — no less than $12.50 an hour in combined wages and benefits. The proposal includes an exception for employers who collectively bargain with their workers. Existing employers would have four years to come into compliance.

The city’s minimum wage is $8.25 an hour. The bill would raise the annual earnings of a full-time employee making the lowest legal wage from about $17,000 to $26,000.

While the bill’s supporters repeatedly said it was not targeted at Wal-Mart, the debate was inextricably tied to the retail giant’s plans, announced in late 2010, to open as many as six stores in the city in the coming months and years.

The union exemption and square-footage requirement rankled Wal-Mart officials, who said those provisions created an uneven playing field — particularly with the unionized grocery chains they plan to compete with in the city.

D.C. lawmakers gave final approval Wednesday to a bill requiring certain large retailers to pay their employees a 50 percent premium over the city’s minimum wage, a day after Wal-Mart warned the law would jeopardize their plans in the city.

A day ahead of the bill’s final passage in July, Wal-Mart told council members and the public that it would not pursue three of the six planned stores and would explore options for withdrawing from the others should legislators proceed. The ultimatum changed no votes on the council.

Wal-Mart spokesman Steven Restivo called the veto “good news for D.C. residents,” saying Gray chose “jobs, economic development and common sense over special interests.”

Restivo said the company will move forward with its stores in the District: “We look forward to finishing the work we started in the city almost three years ago.”

Wal-Mart’s entry into the city has prompted a political identity crisis for many elected officials, forced to reconcile their liberal, pro-union sentiments with the desire to create jobs and better retail options for their constituents.

Key council members, including Mendelson (D) and Business Affairs Committee chair Vincent B. Orange (D-At Large), were unabashed in support of the bill. But Gray made no secret in recent months that, for him, jobs and retail took priority.

Wal-Mart's entry into the city was an early political coup for Gray, and he personally lobbied — some say threatened — top company executives to commit to a store at the Skyland Town Center development not far from his home in Ward 7.

The Skyland store is among those Wal-Mart has threatened to abandon should the living-wage bill become law. Gray said Thursday that the effect of the retailer’s ultimatum was not a decisive factor.

“If I thought that this was really going to be otherwise a tremendous benefit for the people of the District of Columbia, then I would have swallowed hard and done it,” he said.

A coalition of labor unions, clergy members and progressive political activists backing the bill has canvassed neighborhoods and held media events in hopes of pressuring Gray into signing the bill. Wal-Mart and other large retailers, they argued, could pay their workers better wages without significantly harming their bottom lines.

Some said they considered Wal-Mart’s ultimatum a bluff; others said they would rather see the retailer walk away than accept its “poverty wages.” Wal-Mart has pushed back on the notion that its wages are considerably less than other retailers, saying its pay would be “competitive” and accusing the grocery workers union of signing a contract that pays some of its members wages that would not comply with the living-wage law.

Business groups, other retailers and even former mayor Anthony A. Williams urged Gray to veto the bill, citing the potential job losses, the effect on grocery access, “retail leakage” to the suburbs and potential harm to the city’s business reputation.

Gray’s decision sets up a final political showdown with the council, which can override the veto with a two-thirds vote within 30 days. Shortly after he received the veto letter, Mendelson informed colleagues that the override vote will take place Tuesday, at the council’s first legislative meeting since giving the bill final passage in July.

An override would require the approval of nine of the council’s 13 members. The bill passed 8 to 5 , and no member has since acknowledged that their vote could change.

Mike Wilson, a spokesman for Respect DC, blasted Gray’s veto but said he was hopeful the council would overturn it.

“Unfortunately, the mayor bought the line of the Wal-Mart lobbyists and the other sort of corporate interests that have been pushing against it,” Wilson said. “We’re counting on the council to do the right thing on Tuesday, to stand with the residents and override his poor decision.”

One of the members who voted against the bill, Mary M. Cheh (D-Ward 3), said that although she disliked Wal-Mart’s ultimatum in July, her view had hardened that it could put the District at a competitive disadvantage at luring retailers from Maryland and Virginia.

“When I weigh the District’s interests, they weigh more heavily in voting against the bill. I’m not for Wal-Mart or against Wal-Mart,” she said, “I’m against this bill.”

The District's living-wage measure has followed a nearly identical trajectory to a similar bill taken up by the Chicago City Council in 2006. With Wal-Mart planning its first stores there, lawmakers passed the bill, sending it to Mayor Richard M. Daley, who vetoed it. An override vote narrowly failed.

Wal-Mart now operates 10 Chicago stores.

Aaron C. Davis contributed to this report.