Birmingham's Hippodrome Theatre is to be saved from possible insolvency by a £4.3 million city council grant.
The council's ruling Tory-Liberal Democrat coalition agreed to an emergency rescue package because the theatre is struggling to fund a £38 million redevelopment programme and cannot repay an existing loan.
A major refit of the Hippodrome, completed four years ago, cost more than expected while income from shows has been less than anticipated - plunging the theatre into financial difficulties.
A new business plan approved by Hippodrome directors makes no provision for the repayment of an existing £2.8 million council loan. It also identifies a £5.2 million shortfall in funding identified to pay for the refurbishment.
A cabinet report by council director of corporate finance Brendan Arnold makes it clear that the theatre could face insolvency if the council fails to write off the £2.8 million loan.
"Providing the Hippodrome with no additional financial support would leave the theatre in a highly vulnerable position, unable to meet its loan repayment obligations," the report adds.
Even with the assistance of additional council finance, the Hippodrome will still have to find almost £1 million to close the refurbishment funding gap.
The council's rescue package, which will enable the Hippodrome to pay off the £2.8 million loan, will ensure the financial viability of the theatre for the forseeable future, according to the cabinet report.
Mr Arnold said the theatre's business plan had been "downgraded to more realistic levels".
An investigation into the theatre's finances by accountants Deloitte & Touche found that the Hippodrome would be unable to generate enough money to repay the council loan.
The firm found little scope for reductions beyond those already secured, while noting that the theatre had already been restructured and downsized.
The accountants concluded: "Some ideas are being pursued but there is no basis for confidence in a significant improvement in the forecast results."
Birmingham City Council has a long history of bailing out the Hippodrome.
The council granted the theatre a 125-year lease on favourable terms, gave grants of £1.3 million and interestfree loans totalling £3 million to tide the Hippodrome over while it was closed during refurbishment work.
Grants from the Arts Council Lottery Fund, the EU, private fund-raising and the Hippodrome's own resources contributed to most of the £38 million refurbishment.
City council leader Mike Whitby said: "The redevelopment of the Birmingham Hippodrome site has resulted in one of the finest theatres in the UK.
"The council has a continuing commitment to encouraging a thriving and diverse arts and cultural scene in the city and the Hippodrome is a vital and important part of that scene."
John Crabtree, chairman of the Birmingham Hippodrome Trust, said: "We are very grateful for the city council's ongoing support for the theatre.
"The successful completion of the redevelopment project provides us with a firm foundation for our future work."