I have experienced this rental ban situation a few years ago as a B&B owner in New Orleans.  The City's powerful hotel-restaurant lobby began the fight, citing loss of revenue due to the B&B's undercutting their prices (not always the case - in many instances, it was the reverse!).  Soon, the Health and Safety Board was pulled into the conflict, which was to everyone's benefit, as there were many B&B's who did not meet the most basic of code standards.  Very long story short:  it took about 5 years of dedicated group effort, resulting in legislation sanctioning  City-licensed B&B's.  It was not difficult to comply with the regulations, most of us did.  It involved meeting Fire and Safety codes (exit doors, extinguishers, smoke detectors, etc), Health codes (since there was no way the City could inspect and monitor home kitchens, no cooking was allowed, only commercially-prepared items were to be provided to guests, only Continental-style breakfasts allowed, etc.), renting 5 rooms or less, securing a minimum of $1 million in insurance, and paying $200.25 (not a typo!) for a year's license.

However, since there are always outlaws who make life miserable for the rest of us, and especially since Hurricane Katrina, the situation has degraded. With the explosion of the Internet, the competition - both legal and illegal - became impossible to deal with.  Those not burdened with the cost of making renovations to comply to code or purchasing insurance were free to "low-ball" the rates that licensed B&B's had to charge.  Needless to say, customers looking for a deal would turn their backs on safety and comfort, and there was no way we "good guys" could compete.  I tried for 2 years, then sold my business (after 5 successful years) and moved to Paris 3 years ago.

In Paris, I have been renting my apartment on VRBO by the week for the several weeks during the year when I must be out of town.  However, it is my primary residence.  Recently, the City of Paris threatened to enforce an existing law forbidding short-term rentals of less than 9 months - this was in response to the severe lack of available housing for families and those who work here.  It was also a knee-**** reaction to the fact that wealthy foreigners (thus, absentee owners) have been snapping up all the available property, renting it for high prices, and contributing to the exploding property values here.  Since this is my primary residence, I am allowed to rent, within reason.  I pay taxes on my income in both the US and France, have insurance and meet Health and Safety codes (a hold-over from my B&B days).  However, I am in the minority.  The threat continues, though it is widely known that the legislation is being ignored and the City has no means of enforcement, unless a neighbor gets fed up and "turns you in"...

I think the situation you face in Manhattan is a combination of the two above circumstances.  If you could organize, make a strong case for your right to do business and be willing to make certain concessions to the opposition, you might have a good chance of success.  It will take time and effort.Then, the burden will be on the City to enforce whichever regulations it seems fit.  I say:  go for it, don't give up and bonne chance!