The GIC suggested creating the Penola region for vineyards around the town in 2000, but in 2004 a number of winemakers and grape growers in the area successfully appealed to have the Coonawarra region extended to include their vineyards. The town of Penola has since been included as part of the Coonawarra region.
GIC executive officer Jock Osbourne said: "On the basis of the existing evidence, there is a valid argument that having a wine region called Penola that does not include the township of Penola is confusing and potentially misleading - and the GIC agrees."
Discussions with local winemakers and grape growers to establish a region with a different name have proved unsuccessful.
The GIC said it would consider an application for another region in the area, but that applicants would have to put forward a different name.