Theatre chiefs labelled the decision a devastating blow and announced they would lodge an appeal. They said if the appeal was unsuccessful the Oxford Street theatre’s future in its current form would be severely threatened.

The Arts Council said it proposed the cuts because there was too much emphasis on the annual pantomime and amateur productions.

Ironically, the news came at a time when the theatre has enjoyed one of its most successful periods. It has just completed refurbishment of its main auditorium and there has been development of The Academy, an initiative to encourage new directing talent.

In addition, the theatre has posted increased audience figures for all its shows and operated a successful outreach programme, taking productions to rural areas.

Theatre chairman Jim Clark said: “This is a massive setback and we will certainly be appealing.

“We have achieved the targets laid down by the Arts Council over two years.

“This included the magnificent restoration of the auditorium, increased audiences and more than 20,000 young people connecting with a theatre activity.

“Our current plans for 2008 are ambitious, with many creative partnerships planned as well as the second phase of the building refurbishment, including new arts spaces.”

Meanwhile the Arts Council, in a statement, said it remained unconvinced that the theatre has the capacity to build and sustain high audience levels for a year round programme of quality produced work.

A spokesman for the Arts Council said the organisation’s letter to the theatre sets out recommendations for funding over the next three years.

“It is not a final decision at this stage. Harrogate Theatre has four weeks to respond to our recommendation.

“However, we are not convinced the scale of our current investment of public money in Harrogate Theatre represents value for money.”

The theatre, which seats almost 500 was opened in 1900.