The statue in Kings Domain on Linlithgow Avenue was targeted between Sunday evening and the early hours of the King's Birthday public holiday on Monday.
The holiday marked King Charles III's birthday and was celebrated in Victoria and most other states.
A video posted to social media on Monday showed a person wearing hi-vis clothing and a headlamp using a mechanical saw to hack off the head, which topples and rolls to the ground.
The statue was beheaded between Sunday evening and the early hours of Monday. (Rachael Ward/AAP PHOTOS)
Overlaid with the Sex Pistol's song God Save The Queen, the video shows another person spraying red paint over the statue before writing "The colony will fall" at its foot in a darker shade of red.
The video ends with "Happy birthday motherf*cker".
Victoria Police were called after 9am on Monday and discovered the head had been removed and red paint had been thrown at the monument.
Melbourne City Council deputy lord mayor Nicholas Reece said the vandalism was the latest act in a completely vile and reprehensible trend and vowed the statue would be restored.
"The clean up alone is about $10,000 and that's before we get to the cost of repairing and reinstating the statue - this is ratepayers' money we're talking about here," Mr Reece told ABC radio on Tuesday.
"We cannot allow statues to be decapitated or chopped down like this, and that then becomes a trigger for them being removed.
"That's not the way we do it in Melbourne.
"The red paint, the decapitating - that's an act of violence."
The council will consider adding additional contextual information around the colonisation of Australia to the restored statue and installing CCTV cameras to discourage vandalism.
King George V is the great-grandfather of the current King Charles, who might visit Australia later this year.
Mr Reece mulled how the vandalism, which generated headlines around the world, reflected on Melbourne.
"You can't imagine how he must be feeling seeing his great grandfather being decapitated, and the red paint, which is obviously meant to look like blood," he said.
Other statues have been targeted by vandals this year, including a statue of Captain James Cook that was cut off at the ankles in Melbourne's Fitzroy Gardens on February 27.
Another Captain Cook statue at St Kilda's Jacka Boulevard was also sawn off at the ankles the day before Australia Day.
A statue of Queen Victoria at Queen Victoria Gardens near the city was covered in red paint and graffiti on the same day.
A second monument to Captain Cook at Edinburgh Gardens in Fitzroy was found broken and covered in graffiti over the Australia Day long weekend.
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