Oxford's Pegasus Theatre will undergo a massive transformation into a unique arts complex following a £2.7m Lottery pledge.

Members of the Junior Oxford Youth Theatre celebrate news that Oxford's Pegasus Theatre will get a £2.7m Lottery grant, with the theatre's artistic director Euton Daley, centre left, and general manager, Simon Daykin, right

The theatre's seven-year dream of creating a state-of-the-art centre has moved a step closer after Arts Council England (ACE) announced the funding.

Revealing its ambitious project for the first time last night, representatives from the Magdalen Road theatre said the new building would affirm its position as a "cultural leader". The theatre is one of only two applicants in the south-east of England to have been given an award by the ACE from the National Lottery's Good Causes fund.

General manager Simon Daykin, who is championing the project, said: "We applied for similar funding three years ago, but got turned down so it was amazing to find out we'd been successful. Our little world has been turned upside down. "The theatre has worked towards this for so long, it's hard to believe we have taken such a step forward to seeing it come into fruition.

"This will mean so much -- not only the local community but Oxford and the county as a whole."

The run-down 1970s building -- home to Oxford Youth Theatre, which works with several community projects and artists -- will be demolished.

Plans are yet to be drawn up, but Mr Daykin said a unique "awe-inspiring" centre would replace the current "breeze-block box". It will include a new auditorium, purpose-built rehearsal and studio rooms, workspaces for artists and youth projects and office and cafe-bar areas.

It is hoped building will be completed early in 2007, before Oxford receives European Centre of Culture status in 2008.

Mr Daykin would not reveal how much the project would cost, but said discussions were in progress with potential stakeholders. A public fundraising campaign would also be launched in the next few months.

Felicity Harvest, executive director of ACE south-east, said Pegasus had done extremely well to beat off stiff competition.

She said: "Pegasus is key to realising our vision for Oxford's cultural life."

Oxford-based author Philip Pullman, who is a patron of Pegasus, said: "This is a wonderful boost not only for the Pegasus but for the whole of the city and the region."