Proposals to convert the redundant 1930s Odeon cinema on Clerk Street, Edinburgh, into an arts hotel called ZED have now been referred to the Scottish Government.

A planning application submitted by Duddingston House Properties to the City of Edinburgh Council for the conversion and part demolition of the grade B-listed art deco building was approved in October 2008 on the condition that the project be referred to Historic Scotland.

However, uncertainty over the auditorium's interior demolition as part of the designs proposed by Make Architects has resulted in the historic body referring the case to Scottish ministers.

Michael Russell, culture minister, said: "The application concerning the Odeon has attracted a lot of attention, from both those who would like to see its auditorium retained and those who believe it should be adapted for a new use.

"This is a complex case and it is important that all aspects of the application are fully and independently considered to determine the best way forward. It is for that reason I have called in this application for decision by Scottish ministers.

"A wide range of factors will have to be taken into account, including the current economic climate."

If approved, the Art Deco frontage, foyer and external shell of the auditorium would be retained to accommodate a café, a restaurant and a multipurpose space incorporating a film projection area and meeting rooms for community use.

The interior would feature bespoke furniture and fittings designed in collaboration with Scottish artists, while a new public courtyard at the heart of the development would display work from a series of artists.