Melbourne's Windsor Hotel will close within two years, its planned tower redevelopment dumped, in a dramatic conclusion to a lengthy political saga.

Owner Halim Group made the announcement on Friday after Planning Minister Richard Wynne said he would not grant the company a permit to extend the allowed construction time for the project.

The Windsor is thought to be Australia's last surviving grand 19th-century city hotel. Credit:Simon Schluter

The developer previously warned it would not be able to meet the January 2017 deadline to build its 26-storey tower at the rear of the Windsor. With only minor works completed so far, they had requested an extension until September 2018.

Halim Group spokesman Michael Smith said the heritage-listed hotel would now be likely to shut its doors within two years, more than 130 years after the institution first opened in 1883.