The council has pledged to fight the application, armed with a $40,000 legal war chest and its own regulations on appropriate pokies placement.

Kingfish Victoria Pty Ltd, which bought the 1890s Montague Street establishment last August, said the hotel was not attracting enough customers to remain viable, despite a $1.4 million upgrade in 2009.

Alexander Smith, a director of Kingfish Victoria, said the company planned to introduce a Mexican and South Californian menu to the hotel, but needed an expected $2.2 million to $2.8 million annual revenue generated by the poker machines to do so.

They have pledged to donate $37,500 to community projects each year, distributed evenly between the Montague Continuing Education Centre and the 20th Man Fund. The hotel will

also offer work experience and part-time work to students at Montague, a centre for students with mild intellectual disabilities.

Port Phillip council is preparing a $25,000 submission opposing the hotel's application and has put aside an extra $15,000 for legal representation at the Victorian Commission for Gambling Regulation hearing.

It claims the pokies will harm residents of public housing on the corner of Nelson Road and Coventry Street, South Melbourne, and several public housing estates within 2.5km of the hotel.

Port Phillip has a municipal limit of 830 gaming machines. If the Golden Fleece's application is approved, it would bring the total number of machines in the area to 391.

Emerald Hill ward councillor Frank O'Connor said the Fleece, as it was known, was in a "location that doesn't warrant additional poker machines".

Councillor Serge Thomann said South Melbourne's proximity to the Crown Casino was "always a worry" in regard to its impact on vulnerable residents.