Under the plans, which have been submitted by the hotel's new owners, the Caledonian Operating Company, the five-star venue's triangular courtyard would be transformed into a guest lounge and covered over with a new roof and skylight.

The scheme is part of an investment of more than £20 million to upgrade the hotel's facilities over the next few years.

The proposals would also see bedrooms on the south-west side of the hotel extended, as well as an overhaul of its ground-floor bar and restaurant.

The existing Chisholm's and Pullman restaurants would be combined into one major dining area – replacing the current Henry J Beans bar – while a brand new dining area and toilet block would be created on the ground floor overlooking the rear car park.

Hotel chiefs in Edinburgh today welcomed the news, which they said would strengthen the city's tourism industry and improve the redevelopment of Princes Street.

Peter Dornam, chairman of the Edinburgh Principal Hotels Association, said: "The Caledonian and Balmoral hotels are flagship buildings at opposite ends of Princes Street, so a project like this will help the redevelopment of the city's famous thoroughfare."

The 251-room Caledonian, which was built in 1903, is said to be Sir Sean Connery's favourite hotel in Edinburgh. It was taken over by Hilton International in March 2000 and underwent a £6.6m refurbishment, before being sold for £51.7m to the HBoS-backed Caledonian Operating Company in August.

Graham Birse, deputy chief executive of the Edinburgh Chamber of Commerce, said that the revamp would be a "welcome move" for the city's hotel industry.

He said: "The Caledonian Hotel is one of the signature hotels of Scotland.

However, we have seen significant investment in hotels across the city in recent years.

"The current four and five-star hotel market is very buoyant, and there are new top-class venues planned in the coming years. "Therefore, the established hotels in Edinburgh need to look at upgrading their own premises to keep at the forefront of the hotel market. The new owners of the Caledonian look like they have realised this, and the new investment should help to keep up their high standards."

A Caledonian Hotel spokesman said: "We have put in an application to turn the internal courtyard into a new lobby area, which should be a great asset for the hotel. It is currently an unused area, so we are keen to see it opened up and put to better use.

"There are also plans to create a bigger ground-floor restaurant, which would also improve the facilities on offer.

"However, if the plans are approved, no building work would start until 2009, as we are undertaking a renovation project for some of the hotel bedrooms."

The proposals are now expected to be discussed by councillors over the coming months.