Instead, Planning Minister Matthew Guy has opened the door to talks aimed at finding other ways to save the popular live music venue.

“The government is more than willing to talk to the Palace owners, live music operators and the City of Melbourne around protecting this and other venues,” Mr Guy said on Tuesday in response to questions from Fairfax Media.

But the minister said the government did not have the $30 million needed to acquire 20-30 Bourke Street and take on the role of venue operator.

To complicate matters, he said there had been no signs the developer was looking to relinquish the block, with Jinshan Investments applying to demolish the CBD theatre to build a luxury 15-storey “W Hotel”.

“There is no indication whatsoever that the owners would willingly sell this site, thus a protracted legal dispute, using taxpayers' money, would be the likely outcome,” Mr Guy said.

Opposition arts spokesman Martin Foley has called for changes to Victoria's planning laws to protect Melbourne's iconic music venues. He said Premier Denis Napthine should push for the Palace Theatre to continue operating until Jinshan Investments receives approval to build on the site.

The Palace Theatre's general manager, Greg Young, said he was waiting for a “fairy godmother” to broker a deal that would keep the venue open.

Mr Young said the company could not afford to buy the site from the developers. But he would continue operating the theatre if granted another year-long extension to the lease, which is due to expire on May 31.

Jinshan Investments has already said they will not extend the lease and they repeated this view more forcefully again on Tuesday.

“The end of this lease should not come as a surprise to the Palace Theatre's operators and Jinshan is extremely disappointed at how they have attempted to influence the lease terms,” Sinclair Brook development manager Tim Price said.

Mr Price said the company had already allowed the Palace Theatre to continue operating for another 18 months after it purchased the property from Kefi Nominees, which had gone into administration.

“In addition, Jinshan has provided a lease at below market value so the venue could remain viable,” he said.

An application for a 194-room hotel is being considered by Melbourne City Council, after a taller hotel proposal was rejected by the state government.

The developer said the hotel was simply another chapter for a block which has had many different incarnations since the late 1850s, including as a church, nightclub and cinema.

Mr Price said: “The W Hotel proposal is simply the natural evolution of this key CBD site, as it has changed to respond to differing demands and trends in our rapidly growing city over a number of years."