A sale to the state would return the much-loved but neglected heritage building to public ownership, eight years after the Federal Government sold it to a private developer.

The property will go under the hammer this morning at Sydney's Grace Hotel, through sales agents CMF Commercial and The Professionals.

They are representing property owner and Sydney-based developer Sean Ngu.

A Government source said pre-auction negotiations were held yesterday.

CMF Commercial director Jon Buckman confirmed that pre-auction negotiations were held, but said for confidentiality reasons he could not identify who was involved.

The Herald understands that an agreement was not reached. The source said that failing a pre-auction sale, the Government expected to bid at auction.

Mr Buckman said yesterday that interest leading up to the auction was buoyant.

"This property is obviously very dear to Novocastrians' hearts," he said.

Prospective buyers were from a range of fields.

"We've got owner-occupiers and we've got developers who want to do different things with it, and pub owners," Mr Buckman said.

The site has development approval for refurbishment as a bar, restaurant and function centre.

If the state were to buy the post office, it might use the building for government offices or community and cultural activities.

The 1903 sandstone landmark in Hunter Street last sold in 2002 for $1.88 million.

It has been vacant and fallen into increasing disrepair, causing much public concern about its fate.

Community members and civic leaders have called for it to be returned to public ownership.

The Federal Government and Newcastle City Council have ruled out a purchase.

Newcastle State MP and Hunter Minister Jodi McKay declined to comment yesterday.

She reiterated a statement made when The Herald revealed last month that the post office was up for auction.

"The former Newcastle post office is an iconic building that holds great historical significance to the community," Ms McKay's statement said.

"Any decision to purchase the building would be based on ensuring the best outcome for the community and future of the post office."