A serious shortage of wharf space because of booming passenger cruise ship traffic, combined with an urgent need to redevelop Sydney's overseas passenger terminal, has led to the closure of another top-notch restaurant on the CBD waterfront.

After a decade of providing fine dining on the ground level of the Circular Quay terminal in The Rocks, the Japanese-themed Ocean Room says it will close because of the terminal's looming renovation.

The planned upgrade aims to provide more urgently needed wharf space and improve the building's efficiency in processing passengers and receiving ships.

The terminal is regarded as one of the world's most desirable and spectacular cruise locations because of its proximity to the CBD, Opera House and Harbour Bridge. Ocean Room's neighbouring restaurant Wildfire will close on Saturday after its lease was also compulsorily acquired by the state government-owned Sydney Ports.

A spokeswoman for Ports Minister Duncan Gay said ''two restaurants are affected'' by the planned redevelopment, meaning the three-hatted Quay restaurant and Cruise Bar will be spared.

An Ocean Room spokesman said staff felt no ''sour grapes'' about the closure as they had known the terminal would be upgraded one day. ''It's regrettable because it's such a beautiful spot, but we're very respectful of the decision and always understood that this day could come,'' he said.

The restaurant employs 40 staff and its parent company Zetton is considering other sites in Australia to open another Ocean Room.

The number of cruise ship visits to Sydney has risen by more than sixfold in the past 10 years.

In February alone, 25 cruise ships visited Sydney 39 times, with 22 of those visits involving a berthing at the overseas passenger terminal.

The increased demand for cruise ship berths has left one of the biggest lines to service Sydney, Royal Caribbean, seeking to negotiate the docking of its passenger ships after 2015 with the operators of Port Botany.

It is understood that Royal Caribbean would prefer to berth its ships at Port Botany than be forced, as a result of the paucity of available wharfs, to anchor ships in the middle of Sydney Harbour and have to ferry passengers to and from the shore on launches.

A reported $50 million has been set aside for the overseas terminal's redevelopment. This has not been officially announced.

It is not known when work will start but a notice on the terminal's website says that its main function centre will be closed for redevelopment of the building from the end of March to late October, the low season for the international cruise ship industry.