Nobody was hurt in the blaze which police said was caused by a number of petrol bombs thrown into the building at 0600 local time.
The European-owned Tembo disco was popular with tourists.
Last month three Israelis and 10 Kenyans were killed when an Israeli-owned hotel near Mombasa was blown up by a car bomb.
German manager, Walter Reif told AFP news agency that no-one was hurt in the incident.
"I'm not so sure who did it. Some unexploded Molotov cocktails have been recovered," he added.
On Tuesday, a Kenyan restaurant manager became the 11th Kenyan to die in the attack on the Paradise Hotel.
Lead investigator into the attack, William Lang'at, told AFP news agency that Wema Mutisya, 34, died from his injuries.
Investigation
Investigators say the bomb which destroyed the hotel was built in the flat of the key suspect, Saleh Ali Saleh Nabhan, who is believed by police to have owned the vehicle used in the attack.
Police also said Mr Nabhan may be hiding in Somalia.
Mr Nabhan's wife Fatuma, and brother are now reported to have been released on bail by a Mombasa court after being detained by police at the weekend.
Last week police released computer-generated images of two men they suspect carried out the failed simultaneous attack in Mombasa on an Israeli airliner.
The police also announced a $6,000 reward for information leading to the arrest of each man.
A statement dated 6 December, purportedly from the al-Qaeda network, claimed responsibility for the twin attacks and threatened more attacks on Israeli and US targets.
But US and Israeli officials have said al-Ittihad al-Islami, a Somali-based group with links to al-Qaeda, could be responsible.
If Mr Nabhan is hiding in Somalia, investigators believe it will be difficult to find him.
Somalia has not had a central government for more than a decade, and there are no law-enforcement agencies that could help track him down.