But chief executive Brian Williams insisted the group would survive and said several options were being examined, including a possible sale. It is rumoured the unnamed potential buyer is JJW Hotels, the company behind London's Berners Hotel.

Mr Williams said the Scotsman Hotel on North Bridge, which opened in 2001 and recorded an operating profit of more than £180,000 the following year, was trading positively with over 86 per cent occupancy.

It said it had suffered operating losses. And it continued: "The company is not able to meet its bank interest and loan repayment liabilities as they fall due."

The latest accounts show a pre-tax loss of £9.9 million for 2003, following a deficit of £12.5m the previous year. It ended 2003 with net liabilities of £33m, up £10m from the previous year.

Mr Williams would not reveal the identity of the potential buyer. But he said: "There is more than one option available to the group, all of which involve recapitalisation and none of which include ceasing trading.

The Scotsman Hotel is based in the former headquarters of The Scotsman and Evening News. The 133,000 sq ft A-listed building was bought in February 1998 for about £4.3m as part of an ambitious plan to open a European-wide chain.

The English baroque-style 190ft high edifice cost £500,000 to build in 1904 and was hailed as "the most magnificent newspaper building in the world". It features a showpiece marbled pillars and floors, mahogany and walnut panelled walls, ornate ceilings and chandeliers.

After refitting and refurbishment costing £19.5m, it began its new life as a five-star, 68-bedroom hotel in April 2001. It had taken more than £500,000 worth of bookings from as far afield as the United States and Japan before it even opened its doors.

The Scotsman Hotel Group, which also owns Hotel de la Tremoille in Paris, was launched with major financial backing from the Bank of Scotland and Botts Capital Partners.

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