Plans to build a luxury hotel at the site of the Palace Theatre will need to be scrapped due to hight limits for the Bourke Hill precinct.

Planning Minister Matthew Guy has again scuttled plans for a luxury hotel tower on the Palace Theatre site – this time just days before Melbourne City Council was tipped to finally approve the demolition of the former music venue.

On Friday afternoon the minister formally introduced interim 12-month mandatory height limits for the Bourke Hill heritage precinct. It means developers Jinshan Investments will have to reduce the planned height of their 50-metre W Hotel by at least half.

It is the second time the minister has prevented Melbourne’s first W Hotel being approved, after he knocked back an even taller application for the Bourke Street block earlier this year.

“There won’t be any more planning disasters in the Bourke Hill precinct, like the Windsor or the Palace Theatre could have been, because we’re planning ahead responsibly,” Mr Guy said on Friday.

The interim controls will expire in a year and Mr Roser said that, when the permanent laws were formally exhibited, the developers would be fighting the changes “tooth and nail”.

Nevertheless Friday’s decision is expected to be a big blow for those behind the $150 million project, with speculation Melbourne councillors were going to endorse the planning permit narrowly at next Tuesday night’s meeting.

Greens councillor Rohan Leppert confirmed “there was a push on to approve the application”, while Mr Roser said the vote would have been close.

A grassroots community campaign to save the Palace Theatre has continued with regular vigils at the site, despite the loved live-music venue officially shutting its doors last month when the operator’s lease ended.

Federal Member for Melbourne Adam Bandt said new height regulations gave the campaign “renewed hope”.

“Given these new but interim regulations, someone with a bit of imagination and sensitivity can save this unique example of Melbourne’s heritage without demolishing it,” the deputy Greens leader said.

“The community won’t back down in trying to save this much-loved venue from inappropriate development.”