The council is the country's highest Islamic authority and includes major, politically active, Muslim and Islamist religious organizations with millions of followers.
A senior council official told the Agence France-Presse news agency that the concession on bikinis was not enough and that the sarongs still expose too many body parts.
The council described its decision as a recommendation to the government and not an official demand or fatwa.
The council's decisions are not legally binding but do influence many people in Indonesia, which is the world's most populous Muslim nation.
Previously, the council tried to ban cigarette smoking and yoga, but met a mixed response among Indonesia's 240 million population, more than 80 percent of whom are Muslim.
Miss World has already started its monthlong September show, which includes events on Indonesia's only Hindu-majority island, Bali, and a final round on Sept. 28 near Jakarta, the country's capital on the island of Java.
Earlier in August, Indonesia's much-feared, hard-line Islamic Defenders Front vowed to stop the contest no matter where it is staged. "The Miss World pageant is only an excuse to exhibit women's body parts," front leader, Riziek Shihab, said according to the AP.
"We are obliged to disband it if the government allows it to be held in any region of Indonesia."
Previously, the front has also thrown rocks at Western embassies during rallies and fought with rival religious organizations in an effort to force Indonesia's moderate Muslim society to adopt Shariah law.
Last year, Lady Gaga canceled her sold-out show after she was denounced as a "devil worshipper" by the front.
Miss World may face less opposition in Bali, because the island's population is mostly Hindu and welcomes foreign tourists and other international influences.