Biological nitrogen removal through the nitrite pathway (NH4+ → NO2– → N2) is favorable for wastewater treatment plants without sufficient carbon sources. This study demonstrates an innovative approach for attaining the nitrite pathway based on sludge treatment using free ammonia (FA, i.e., NH3). This approach is based on our innovative discovery in this study that FA at 210 mg NH3–N/L is far less biocidal to ammonium-oxidizing bacteria (AOB) than to nitrite-oxidizing bacteria (NOB). A total of 22% of the activated sludge from the sequencing batch reactor (SBR) receiving synthetic domestic wastewater was treated in an FA treatment unit at 210 mg NH3–N/L for 1 day. The FA-treated sludge was afterward recirculated back to the SBR. A nitrite accumulation ratio of above 90% was quickly achieved (in 40 days) and maintained stably in the SBR, indicating the establishment of the nitrite pathway. The NOB population and activity after implementing FA treatment was less than 5% of those without FA treatment, suggesting the washout of NOB. In contrast, the AOB population and activity in the SBR were not affected. The nitrogen-removal performance was significantly improved after incorporating the FA approach. The FA approach is a closed-loop approach and is economically and environmentally attractive.