An illegal banner unfurled from the balcony of the Kings Cross Hotel has become the latest battlefront in a long-running feud over Sydney's lockout laws.

The hotel has been told to take down a "Keep Sydney Open" banner or face a fine of $6000, after a residents' group, which strongly supports the lockout laws, complained to the City of Sydney council.

The sign will be taken down on Friday, more than a week after the hotel installed it without first seeking development approval from the council.

"We had good intentions in putting the banner up. It was about supporting a community initiative and local businesses in the area," said Dan Lacaze, marketing director at Solotel, which owns the Kings Cross Hotel.