The scheme, devised by Anne Machin Architects, involves adding a sixth floor, including roof terrace, to the famously-kitsch 1924 store, which sits within the Regent Street Conservation Area near Carnaby Street.
It also proposes demolishing part of the shop, originally designed by Edwin T Hall and known simply as the Tudor Building.
Under Machin's controversial plans almost half the chintzy building would be redeveloped as a 41-bedroom boutique hotel, restaurant and bar. Moreover, part of the existing fabric of the building, on 26 Marlborough Street and 1A Little Marlborough Street, would be replaced with a modern, five-storey glazed building.
However, Westminster's planning committee blocked the proposal last Thursday, objecting to the design, loss of existing retail space and its impact on the so-called West End Stress Area.
'The replacement design is very modern and uses a lot of glass and this was felt to be inappropriate for the local conservation area and the impact on the Grade II-listed building,' Westminster City Council case worker Josephine Palmer told the AJ.
'The committee also opposed the loss of 689m 2of retail floor space at second-floor level and 583m 2at basement level, and its effect on the West End Stress Area, in other words, that there were already a maximum number of restaurants in the area.'
Liberty declined to comment on whether or not it planned to appeal the council's decision.