The former Royal High School building is to go back on the market after City of Edinburgh Council stripped the developer of its 120-year-lease.
The council's finance committee made the decision on Thursday.
It had the choice to continue with the lease, retake control of the building, give the lease to music school backers or put the lease on the market.
The A-listed landmark was built in 1829 by Thomas Hamilton but the school relocated in 1968.
It later became home to the City Art Centre before being proposed as a home for the Scottish Parliament and a new national photography centre.
City of Edinburgh Council launched a competition seeking proposals for a hotel redevelopment in 2009.
The winner of the competition, Duddingston House Properties, was then granted a 125-year lease of the building, with Edinburgh City Council retaining ownership.
The developer has been trying to gain approval for various hotel schemes ever since.
Now the council has decided to strip Duddingston House Properties of its contract, and put the lease back on the market.
The severing of the contract with the developers will provide hope for the Royal High School Preservation Trust, which is hoping to relocate St Mary's Music School to the site.
However, that project is not guaranteed as the backers will have to compete on the open market for the lease.
In 2015, plans for a £75m luxury hotel, in partnership with London property developers Urbanist Hotels, were narrowly rejected during a meeting of the council's planning committee, following outcry from conservationists and heritage groups.
The plans would have seen two six-storey wings built on either side of the former Royal High School building, and attracted objections from groups including Historic Scotland and more than 1,700 members of the public.
After their planning application was rejected, the decision was appealed to the Scottish government.
However, this appeal was delayed as the developers unveiled new, scaled-back proposals for the site, which were submitted to the council for consideration.
The new proposals suggested the wings would be smaller and set further back from the road, opening up views blocked off under the old scheme.
This time, more than 3,000 members of the public objected to the plans, which were rejected by the council in August 2017.
The rejection of the revised plans restarted the appeal to the Scottish government, and in October last year the plans were rejected by the government's planning and environmental appeals division.