Duddingston House Properties and Urbanist Hotels had appealed against the refusal by Edinburgh City Council of two schemes for the former Royal High School building on Calton Hill in December 2015 and August 2017.
International hotel chain Rosewood had been lined up to operate the hotel, which would have housed public bars, restaurants, an art gallery and performance spaces..
The £75m project for the city council-owned building, which was long touted as a home for the Scottish Parliament, was expected to create more than 260 jobs and estimated to be worth more than £35m to the city’s economy had it gone ahead.
But the scheme, which was instigated after the city council staged a competition a decade ago to find a luxury hotel operator for the building – involved the creation of two controversial "Inca-style" stepped extensions, one on either side of the main building.
The developers said the extensions were essential to make the hotel project viable, but critics likened them to putting "Mickey Mouse ears on the Mona Lisa". However their plans were twice rejected by the council’s own planning committee.
The government’s ruling on the development stated “Overall the proposal does not represent the right development in the right place."
It described claims by the developers that the development would be “nationally significant” once it was up and running as “a stretch.”
The government’s ruling added: “Ministers conclude that the proposed development would not preserve the former Royal High School building or its setting and would neither preserve nor enhance the character and appearance of the Edinburgh New Town Conservation Area.
However Urbanist Hotels chairman David Orr said: “This is a deeply disappointing decision for us, our investors, and our hotel partners. It is a poor day for inward investment in our vital tourism sector.
“It is now 50 years since the old Royal High School had a proper use and we still do not have a solution that safeguards its future. This decision leaves a magnificent building more at risk than ever.
"As a globally significant city, Edinburgh would have been ideally suited to host a Rosewood hotel.
“It is extraordinary that during a national crisis, at a time when it has never been more important to support Scottish tourism and jobs, our country has been denied a world-class hotel to put it on a level with other European capitals.
"This will not help attract the return of the valued visitors that know us and the access to new markets that Rosewood patently has.
"We will be gathering our thoughts as to what we do next. "
Alternative proposals to develop the site for St Mary's Music School were given the green light in 2016 with a seven-year expiry date on consent due to the unique situation with the hotel plans being appealed.
Despite the approval of the music school plans, St Mary's had no right to the building because of an agreement between the council and the hotel developers, which is understood to run until 2022.
Dr Kenneth Taylor, headteacher at St Mary’s, said today: “Everyone at the music school is heartened at the very welcome news that we are a significant step closer to securing the old Royal High School as our new home.
"Thanks to the wholehearted support and generosity of Dunard Fund, the funding is in place and a future on the world stage for a cultural hub for music education and outreach in Scotland has now opened before us.”
William Gray Muir, chair of the Royal High School Preservation Trust, which was set up to pursue the alternative development on behalf of the music school, said: “Scottish ministers should be congratulated on this considered and sensible decision.
"Their recognition of the importance of the building reinforces our belief that it is the perfect place for Scotland’s national music school. Doing so will bring together two of Scotland’s national treasures.
"We hope the council will now be in a position discuss how we can jointly make this happen. With their agreement we would be able to start work immediately, with the necessary planning consents and funding already in place.”
Campaigners, historians and heritage experts had warned that the multi-storey extensions to the building would endanger the city’s World Heritage Site status.
In a statement, the Edinburgh World Heritage trust said: “This was always a highly insensitive commercial development which would have been deeply damaging to an internationally recognised masterpiece of Greek Revival architecture, as well as to the designed landscape setting of Calton Hill, and to the visible contrast between the Old and New Towns."
EWH director Christina Sinclair added: "Had there been a proposal for an appropriate reuse of the old Royal High School, which understood and creatively conserved and enhanced its heritage values, it would have had our full support. However, this development would have caused serious harm to the World Heritage Site.”
Terry Levinthal, director of the Cockburn Association heritage group, said: "Not only would the scheme caused irreparable damage to the fabric and setting of this A-listed building, its economic value to the city’s economy was significantly less than had been said.”
Cockburn Association chair Cliff Hague said: “We hope the development interests behind the hotel scheme will step back from their lease to allow the St Mary’s Music School proposals to advance.
"This scheme, which is a much more appropriate civic use, has planning consent and is fully funded.”
Neil Gardiner, planning convener at the city council, said: “We welcome today’s decision by Scottish ministers to fully endorse our previous decisions to refuse these applications.
"We’ll now consider options for the site and bring a report back to councillors in due course on how to secure the best long term future for this outstanding building in Edinburgh’s World Heritage Site.”