It has stood empty and untouched since the island was divided between its Greek and Turkish communities 25 years ago. Now Rauf Denktas, the Turkish Cypriot President, has found a way of trying to open it. He says refugees from Kosovo could stay there.
"It's like the Mary Celeste in there," says one Western diplomat who has visited a hotel in the sealed town. "It's a complete time capsule of 1970s hotel decor, all orange and brown wallpaper."
Varosha was the Greek quarter of Famagusta. When the Turkish army invaded in 1974 in response to a Greek Cypriot coup, Varosha's inhabitants fled. Locals say they left so quickly there are still clothes in the houses.
Although it is now in Turkish Cypriot territory, Varosha has been closed ever since. Turkish and UN troops patrol the site.
Mehmet Ozbada, who manages a local wine bar, says of the idea: "They're 25 years too late. It should never have been closed." But Nafiya Kemal, a London-born Turkish Cypriot who works at the only hotel on the beach outside the closed area, says: "I think it's a great idea to put refugees in there. It's just wasted there, and homeless people could use it."
But the Greek Cypriot government doesn't agree. Varosha is protected by a 1984 UN Security Council resolution, which says the empty town can only be resettled by its original inhabitants, who were almost all Greek Cypriots.
The Turkish Cypriot authorities say the offer is purely for humanitarian purposes but some observers argue the refugee offer is just another attempt to open Varosha permanently. The North Cypriot authorities have been trying to have the resort unsealed for years. The North has struggled to keep up with the tourism boom of the South. Holidaymakers are put off because Turkish Cyprus is an unrecognised pariah state, and flights must be routed via a Turkish airport. A new threat is tourists' fears of Kurdish terrorism.
Varosha is just the sort of resort the North needs. But, under the UN resolution, only the Greek Cypriot owners of the hotels can reopen them. They have refused repeated invitations from the Northern government to come back and operate the resort, or receive compensation so Turkish Cypriots could take over.
But Mustafa Guclu of the Turkish Cypriot Foreign Ministry points out that properties were abandoned all over Cyprus before partition. He says there is no reason why Varosha should be an exception. "My friend's father had to leave his hotel on the Greek side. He got nothing. Now a Greek Cypriot is running the hotel. There should be a property exchange from both sides."
The Turkish Cypriot authorities say the refugees would not be settlers, but only temporary inhabitants. The UN mission in Cyprus say that would still be unacceptable.
However, it is rumoured that the Turkish Cypriots have already opened student hostels in Varosha, despite protests from the UN mission. It seems they are determined to use the ghost town one way or another.