Police were called to the Art Roch in the Grassmarket after more than 20 people yesterday refused to leave the building or allow security staff to enter.
The residents, some of whom say they have lived at the hostel for more than a year, said they had been stunned to find a notice telling them to quit.
It is understood the company which owns the building has gone into administration, leading to the hostel owners planning to move out.
But with most of the residents having nowhere to go – and no chance of finding alternative budget accommodation during the Capital’s festival season – they instead shut themselves in.
Quentin Rosettenstein, a chef from South Africa and a long-term resident at the hostel, told the Evening News: “The police did try to get in at first but when we explained to them what was happening they said they weren’t going to break the door down as we are behaving peacefully.
“We were told yesterday that we needed to be out of here by 11 o’clock this morning. There were notes posted on the doors saying the place was closing and we had to vacate.
“We’ve been served with no official paperwork.”
He added: “This is our home – some of us have lived here for years and we all pay our rent. We’re all foreigners – there’s people here from South Africa, Australia, New Zealand, Spain – so it’s not like we have any family here.
“How could we find somewhere else to stay at this short notice, two weeks before the Festival?”
The hostel was opened by Malcolm Scott, the former treasurer of the Scottish Conservatives, in 2010.
It was reported earlier this year that the building’s owner, Prestonpans Trading Ltd – of which Mr Scott is listed as a director – had gone into administration.
A spokesman from administrators KPMG said yesterday: “Prestonpans (Trading) Limited owns a property at West Port in the Grassmarket which is leased to Lothian Hostels Limited, which trades from the property as the Art Roch Hostel.
“We understand that Lothian Hostels Limited has taken the decision to cease to trade from the property and is taking steps to close the Art Roch Hostel.”
Staff and residents at the hostel also claimed that the building has fallen into disrepair, and has suffered infestations.
Leah Silverlock, assistant manager at the Art Roch, said: “I was in shock, I still am. It was awful. People were asking me all sorts of questions I had no answers to and I had to tell these paying guests that they had to leave.”
She added: “The hot water hasn’t been working properly for seven months and neither has the electricity.
“A year ago bed-bugs started appearing in the rooms. No-one will answer any of my questions or deal with complaints or repairs.
“Malcolm Scott has said that it’s nothing to do with him anymore, that we have to deal with KPMG.”
Mr Scott visited the hostel last night, but refused to comment to the Evening News.
THE residents staging the protest at the Art Roch are foreign workers, some of whom have been living there for more than a year, but the hostel also catered for short-stay backpackers and groups.
When it opened, it was billed as the “cult hostel of the future” with accommodation for more than 190 people and said it welcomed “groups of all types and sizes”. It advertised itself on the Edinburgh Hostels website declaring: “if you are looking for a fun time this is party central.”
Residents had objected to the hostel, claiming it would attract “large groups who just want to get as drunk as possible”.
But a Lonely Planet review said: “The new Art Roch Hostel tries to be all things to all people, and pretty much succeeds. There are mixed and female-only dorms, family rooms, an executive floor for business travellers, and a specially equipped room for wheelchair users. There’s a very cool common room with loads of sofas, a hammock and pool table.”
Last year the hostel hosted the inaugural Edinburgh International Haggis Championship when city school pupil John Davis, 17, beat 30 other competitors by gobbling a pound of the national dish in two minutes.
And it announced it was to become the first hostel in Europe to provide a butler, with services ranging from breakfast in bed on a silver tray, to a personal tour of the city.