Recent internal damage wrought on the Palace Theatre is so bad that it is no longer worth saving, an independent heritage consultant has found.

In a move likely to open the door to demolition, Graeme Butler has reversed a recommendation to Melbourne City Council that the century-old entertainment venue be granted local protection.

Activists fossick through a skip containing material taken from the Palace last week. Credit:Eddie Jim

That is because in the past two months construction workers have destroyed key features of the theatre, at the same time the heritage review was under way.

Jinshan Investments has applied to build a seven-storey hotel at the 20-30 Bourke Street address, but a heritage listing could have prevented its demolition bid.