First the Cavern went. Then the Wigan Casino and later the Hacienda. In January yet another legendary northern music venue will be razed to the ground when bulldozers get to work at Whitworth Street in Manchester, site of the Twisted Wheel, the birthplace of northern soul.

Despite a campaign to save the venue, Manchester city council approved plans to turn the site into a budget hotel. After a final all-nighter on New Year's Eve, the club will close for ever. Granting permission in July for the construction of a 330-room hotel, the council acknowledged that "the Twisted Wheel club has played an important and pivotal role in developing Manchester's cultural and musical history".

As well as being where the northern soul scene and style took root, the venue also hosted early performances by Tina Turner and Rod Stewart. Black musicians from the US loved the rapturous reception they received at the club‚ a marked contrast to the abuse back home in segregated America. The Rolling Stones famously went there after one of their Manchester gigs and the DJ responded by playing all of the black soul originals they had ripped off on their first LP.

Despite this rich heritage, planners decided that "any harm caused would be outweighed by the substantial regeneration, economic, environmental and social benefits of the scheme".

Plus, said the planners, while "the Twisted Wheel club in Whitworth Street was the first club to play and promote northern soul music from 1965"‚ "[by] 1971 … it was in the large dance halls at Wigan and Blackpool, for example, where space allowed for the movement to further develop to its most popular".

Though the club these days is called Legends – "it hasn't been called the Twisted Wheel since it was closed down by police in 1971" – since 2000 a northern soul revival night has run twice monthly at the venue under the Twisted Wheel banner, attracting up to 700 soul music devotees of a certain age.

Council planners said Legends these days primarily hosted gay and lesbian club nights, changing its "social value". The planners said: "The heritage values of the club complex are not considered to be of sufficient special interest to warrant statutory designation of the buildings." In other words, it has no special protection by being listed. For several years a group has campaigned to have a blue heritage plaque erected outside – "so far to no avail".

Not all of the old-timers are sentimental about the building. "I'm not sad to see it go," said Phil Saxe, former head of A&R for Factory Records, who was a DJ there between 1969 and 1971. "In the 60s it was at the forefront of youth culture, but that was then. When the club shut in 1971 the northern soul scene moved to the Torch in Staffordshire, the Wigan Casino and the Blackpool Mecca. The Twisted Wheel night which runs in the club now is a Motown night which just happens to be held in the original home of the Twisted Wheel. These days it's just a club for old people who want to go out dancing on a Sunday afternoon. It's a pastiche of what once was."

Just a few months before police shut the venue in 1971 (they suspected drugs stolen in chemist shop raids were being sold at the unlicensed venue), a visiting music journalist from London, Dave Godin, coined the phrase "northern soul" after hearing records he could not find in the capital.

Dave Fawcett, who was a regular "Wheeler" between 1966 and 1969, said he was "gutted" when he heard the club was closing.

"They're getting rid of part of our heritage. That place was unique in the 60s and it's irreplaceable," said Fawcett, who now runs the Twisted Wheel Facebook group. He and others note that Liverpool city council regretted demolishing the Cavern club, where the Beatles used to play, and ended up having to rebuild it.

Fawcett says the club was "very edgy" in its 60s heyday – "in that it was publicly regarded as a hellhole full of drug-crazed zombies. Whereas if you were a Wheeler, it was a great friendly club at the cutting edge of fashion musically and dress-wise."

He recalled coming home as a teenager from an all-nighter to find his father reading the paper, aghast at tales of drug-taking and debauchery at the club. Yes, people took amphetamines, said Fawcett – "but only so they could keep dancing". Rather like in the rave scene which followed a few decades later, he added.

The original Twisted Wheel was born in 1963 in coffee bar in Manchester's Brazennose Street. According to Dave Haslam, author of Adventures on the Wheels of Steel, the club's reputation was forged by the original band booker and DJ, Roger Eagle. "He created the club's reputation, playing soul, R&B and ska and booking amazing acts, like Screamin' Jay Hawkins and John Lee Hooker," said Haslam.

Manchester council said the developers, London-based Olympian Homes, had explored ways to retain the cellars and possibly the club. But the idea was rejected by Motel One, the German hotel operator that will run a hotel on the site.

A council spokesman said: "We recognise that many people have very fond memories of northern soul nights at this venue, or at the club's original home on Brazennose Street. However, while it's sad to see the end of Twisted Wheel, our planning committee has to follow strict legal guidelines rather than sentiment when considering applications and each application has to be considered on its own merits."

• This article was amended on 28 December 2012. The original said Dave Fawcett wrote a book about the Twisted Wheel called The Manchester Wheelers and ran the manchestersoul.co.uk website. That is not the case, although he contributed to both.