Sydney-based owners, who bought the 152-year-old sandstone prison late last year, will pull out of the sale before the looming settlement date.

The shock development comes after a recent visit to Beechworth by the Dunnet family who bought the jail after being passed in at auction in late November.

The Old Beechworth Gaol advisory committee established by Indigo Shire to liaise between the owners and council has been informed of the decision not to proceed with the sale via the committee chairman, Cr Bernard Gaffney.

"The Dunnet development group has confirmed they have served a notice to withdraw from the contract of sale of the former jail site in Beechworth," he said.

"They have made this decision on legal advice.

"I cannot say any more in relation to this aspect I'm afraid."

The Dunnet development group's plans have been shrouded in mystery since the auction.

The jail was passed in at auction for $1.75 million before selling for more than $2 million.

The Beechworth Gaol was opened in 1864 with two of its more high profile inmates being bushranger Ned Kelly and Melbourne underworld kingpin Carl Williams.

The heritage-listed site has council approval for a 24-lot residential sub-division, but still requires the green light from Heritage Victoria.

Beechworth lawyer Graeme Bailey bid on behalf of the Dunnet group at the auction.

Cr Gaffney met Dunnet representatives on their visit to Beechworth recently.

"It is a major setback for the town because something has to be done with that site," Cr Gaffney.

"It cannot be left to just rot and agistment for sheep.

"The Beechworth jail site has the potential to be the greatest tourism attraction in North-East Victoria.

"It would be worthwhile for the Beechworth chamber of commerce to present a business plan for the future use of the jail to the sub committee.

"When the Bendigo jail was revamped it attracted 50,000 visitors in the first six months."

Selling agent Rod Devlin declined to comment when contacted by The Border Mail.

Indigo Shire and the Andrews Labor Government have previously ruled out buying the jail site.

The jail sold for $1.7 million 12 years ago.