The theatre learnt of the decision in a letter from the council

The Northcott Theatre in Exeter risked losing its annual �547,000 grant - about a third of its income - from April 2009 as part of national cuts.

The Arts Council has agreed to continue funding until 2011 but said the theatre must become a "centre of excellence".

A theatre spokesman said they were "relieved and very pleased".

The theatre learnt of its decision in a letter from the council which said funding from 2009 to 2011 would be reserved, but the Northcott must go on to demonstrate its "true potential as a centre of excellence".

There is still some work to do, so it is not quite time to pop the champagne corks yet Northcott Theatre spokesman

The theatre will now need to agree on a timetable with the council of how it can develop further.

The Northcott spokesman said: "We have just announced it to the staff who, of course, are delighted that their jobs are secure for the immediate future, although there is still some work to do, so it is not quite time to pop the champagne corks yet.

"We are very positive that we can move forward."

It follows a high-profile campaign to save the theatre in which a 26,000 signature petition was handed in at a meeting of the regional Arts Council in Exeter.

The Arts Council had said it had concerns about the way the theatre was run.

The theatre reopened in December after an 11-month �2.1m revamp.

Theatre bosses said there was a possibility the Northcott could close without the Arts Council funding, with the loss of 58 jobs.

The Arts Council has been reviewing the funding of 200 organisations nationally.