A heritage building in Lonsdale Street in need of a massive overhaul instead will be demolished and replaced with a 34-level office tower.
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The Princess Mary Club, which is next to the Wesley Church, was built in 1926.
It provided accommodation in the city for young women who would otherwise be unable to receive a tertiary education.
The Uniting Church website said it continued in this role until about 1970.
The church, which owns the building and others on its sprawling Lonsdale Street site, has teamed up with Leighton Properties.
Under an agreement, the builder will restore the church and buildings, and create a substantial new park.
To fund the work, Leighton will tear down the Princess Mary building and build the office tower.
Heritage Victoria has granted permission for the demolition.
However, the office tower could not proceed until there was approval for a replacement.
Planning Minister Richard Wynne approved the tower.
He said the design respected the site's heritage values, and enhanced the precinct's streetscape through new open space, and two public walkways.
He said the development protected the church and gave certainty about site maintenance.
"It's a shame we're losing the Princess Mary Club but this is a good outcome for the site long term," he said.
However, opponents said allowing the demolition was outrageous.
City resident Maureen Capp said the Uniting Church was being "rewarded for ignoring this building for so many years".
Fiona Patten, an upper house member of the Victorian Parliament, said she was "incredibly disappointed" to lose the building.
"We are seeing the loss of architectural and social heritage," she said.
The Princess Mary Club was built after a donation from a philanthropist.
Ms Patten said the demolition set a "terrible precedent for other philanthropic families to not bother to give money to charities, as those charities may change the nature of their donations at a later stage".
