John Brumby, leader of the government for Victoria, said the most important thing in the AUS$260 million (£158 million) project is to save the building, the Age reported.
"The reality is the best way to preserve an older building and a facade and a streetscape is to have an appropriate commercial use for it,'' he said.
Plans to demolish part of the rear of the hotel and build a 26-storey tower have been approved amid opposing opinions.
The National Trust and community groups are protesting against the redevelopment of the 1883 hotel.
Established originally as The Grand, the Windsor Hotel was built following the gold rush of the 1950s.
Notable guests have included Sir Laurence Olivier, Katharine Hepburn and Anthony Hopkins but the hotel struggled in the 1970s and was saved from demolition by the government.
Several refurbishment projects have been carried out over the years but the building now stands in a poor state of repair.
Posted by Craig Francis