An advertisement in this week's edition of free entertainment magazine Beat included an infamous paparazzi photo of Britney Spears getting out of a car without underwear.
The advertisement says: "Free glass of champagne for first 100 ladies flash bra (sic) or undies to bar staff; for free drink hang your undies on the line above the bar for $50 drink card."
As the promo evoked furious reactions, the government stepped in.
Acting Victorian Premier Rob Hulls on Thursday said the hotel's actions were "inappropriate".
"In this day and age, in 2008, to be promoting the drinking of alcohol along those lines, I just think is part of a bygone era, and ... the liquor control commissioner has stepped in," he told reporters.
The state liquor licensing director Sue Maclellan on Thursday ordered Saint Hotel licensee Cameron Manning to scrap his No Undie Sundie event.
Ms Maclellan met Manning who agreed to cancel the promotion, which had been planned for this Sunday.
Her office said she had the power to ban such events if they are "likely to encourage irresponsible alcohol consumption or is not in the public interest".
The Saint, which was caught in controversy in June when it employed a dwarf to pour liquor down the throats of patrons, would risk a fine of $13,000 and its licence if it defied the ban, the office said.
Melbourne Centre Against Sexual Assault spokeswoman Deb Bryant said the event was no laughing matter, and the pub was not the first to hold such a promotion.
A search of the web showed similar "no undies" event held at pubs in the US and Canada and a "no undie Monday" event claiming to raise money for children in need in the US.
Ms Bryant said a pub in Melbourne's west last year encouraged women to "come in in bikinis".
"It is totally irresponsible, using women to promote those sort of views let alone in terms of irresponsible drinking," said told AAP.
"I would hope women that frequent that venue tell bar staff `that's just not okay' ... or I suggest they don't go to that venue.
"It's not appropriate, it's sexist and just encourages inappropriate attitudes towards women."
The hotel industry lashed out at the pub, accusing it of sexism and undermining the hotel industry with tasteless conduct.
The Australian Hotels Association (AHA) said the Saint was one of a handful of maverick venues that was "sexist" and out of step with community standards.
"It is unacceptable for a handful of maverick venues to undermine the appeal of our industry by tasteless promotions like this one," AHA chief executive Bill Healey said in a statement.
"We are continuing to work hard to ensure that all licensed venues promote responsible consumption of alcohol and we believe this promotion is inconsistent with this objective."
Hotel management was on Thursday unavailable for comment.