No room at the Ritz as Fayed's ailing hotel closes its doors

The hotel which coined a new word for "luxurious" and has welcomed celebrity guests from Coco Chanel to Diana, Princess of Wales, is closing for two years for complete refurbishment.

The €850-a-night Ritz in Paris, the first hotel to carry that name, is to be gutted and rebuilt from next summer. Its owner, Mohamed al Fayed, has decided to take drastic action after the Ritz failed to qualify for a new category of "palace" hotels in Paris this year. Most of its 500 staff will be laid off during the refurbishment.

The Ritz, on the Place Vendôme close to the Tuileries Gardens, was the place from which Princess Diana and Mr al Fayed's son, Dodi, left on the ill-fated car journey that ended with their deaths on 31 August 1997.

The hotel, opened in 1889 by the Swiss hotelier César Ritz, is a byword for luxury and style. It was the first to have en suite bathrooms and, together with its sister establishment in London, gave the English language the word "ritzy". It also inspired Irving Berlin's 1929 song "Putting On The Ritz" and F Scott Fitzgerald's novella The Diamond As Big As The Ritz.

Guests at the Parisian landmark have included Fitzgerald and his wife Zelda, the writer Marcel Proust, actor Charlie Chaplin and designer Coco Chanel, who had a suite there for years. Ernest Hemingway claimed to have "liberated" the hotel, or at least its bar, from the Nazis in August 1944.

Earlier this year, the Ritz was left out of a list of nine top-class Paris hotels in a new super-category known as "palaces". Although no official reason was given, industry sources said at the time that the Ritz was looking "tired" and did not meet the most exacting modern standards. It was last refurbished in 1979.

"The façade and rooms are one thing but the nuclear core of a palace hotel is out of sight, in the kitchen or the basements where the new electronics and computer systems are stored," said Georges Panayotis, of the hotel consultancy MKG.

An influx of super-rich Arabs, Russians, Indians and South Americans has created a booming market for luxury in the French capital. Three new five-star hotels have opened in the past 12 months. Another legendary but tiring establishment – the Crillon at Place de la Concorde, was recently been bought by a Saudi prince who is reported to be preparing to spend €100m on an upgrade.