City of York Council stripped her of the title during a meeting at the Guildhall in York on Thursday evening.
The removal comes following fresh revelations about the former duchess' connections to Epstein.
Speaking during the debate, Liberal Democrat councillor Darryl Smalley said: "We now know, following the release of thousands of documents, that Sarah Ferguson too had a close friendship with Epstein, which continued well beyond his conviction.
"We don't expect recipients of York's highest honour to be saints. We simply do not want them to be best friends of convicted pedophiles.
"We stand with victims. We stand for the rule of the rule of law. We stand for decency."
He added: "York will have hopefully have etched out our city's connections to both Andrew and Sarah.
"We must wipe the slate clean, draw a line. Remember our duty to victims of sexual abuse, and move forward with our highest honour reserved for those that truly deserve the privilege. I urge all councillors to vote for the motion."
Labour councillor Anna Baxter said: "We are not living in 1987, and it is right that the honours associated with our city reflect the values of York today.
"It is reserved for those considered to be people of distinction, but those who have rendered eminent service, and it reflects the values we wish our city to be associated with."
Councillor Claire Douglas, leader of the Labour group on the local authority, said: "As the people of York would expect, holding this status requires upholding the values and behaviours consistent with such an honour.
"Those who continued to associate with Jeffrey Epstein after his crimes became widely known fall well short of these expectations.
"Sarah Ferguson falls into this category as the Epstein files have shown. I therefore call on council to support the motion as presented."
Sarah and Andrew Mountbatten-Windsor were given the honour as a wedding present from York in 1987 during a visit to the city.
Councillors removed Andrew's Freedom of the City of York in 2022 and the meeting at the time heard that he was the first person ever to have it taken away.
The honorary freedom of the city is given to residents who demonstrate notable service, to distinguished people and to royalty, the council has said previously.
Six companies linked to the former duchess started winding down in the wake of the publication of the Epstein files, according to Companies House documents.
Sarah's Trust, a charity she founded, also announced it would close "for the foreseeable future".
The Press Association has approached Sarah Ferguson's representative for comment.
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