The Studio, which has trained stars including Lesley Garrett and Joan Rodgers, operates out of shared rooms at Morley College, a further education college in London.
An independent assessors' report for the Arts Council condemned the conditions of the Studio as "truly awful" and said: "It is embarrassing to see the cream of British vocal talent being nurtured in such a terrible environment."
A group of wealthy patrons found an alternative base regarded as ideal near Euston, London. They privately supported its purchase, pending the lottery application. But the application's rejection has forced the property back onto the market and it is about to be sold.
David Blackburn, who is on the Studio's board of management, said: "There is a real risk the Studio won't continue. They can't continue at Morley College - it's a miracle they have survived there, the circumstances are so bad."
The effort and expense of the application has put the Studio in deficit for the first time in years, although the patrons intend to donate profits from the building sale. The new base would have allowed them to generate money by renting out rehearsal space which is at a premium in London.
However, Hilary Boulding, the Arts Council's new head of music, hoped the Studio would be able to develop its work, despite the grant rejection.
"They're a very significant organisation and I think they could be even more valuable. They have extraordinary expertise and we want to see what else they could supply to the industry," she said.
The National Opera Studio was set up by the Arts Council in 1978 to provide high-level, intensive tuition for young singers on the verge of careers as solo artists. It includes work on movement and acting and increasing vocal stamina.
It gets just over pounds 100,000 a year revenue funding from the Arts Council and benefactors raise a further pounds 300,000 a year.
Britain's opera companies, including Opera North, Welsh National Opera, English National Opera and the Royal Opera House, are on the board of management and many fund singers' attendance.
Nicholas Snowman, of Glyndebourne Festival Opera, said they trained young singers in their chorus but the Studio offered invaluable extra help. "They seem consistently to find people who are going to go on to be very important singers," he said.
Anthony Freud, general director of the Welsh National Opera, said the Studio's work complemented what the opera companies were able to do alone. "The track record of the students speaks for itself. When you think of what they have contributed to the opera business in Britain and the reputation of Britain abroad, it's startling."
One of the two rooms occupied by the Studio has to be vacated at 6pm when filing cabinets have to be wheeled into the other room. "This is one of the central planks of post-graduate training in the UK - it's breathtaking," Mr Freud said. "It needs its own home, particularly if anybody expects it to broaden its services."
- More about:
- Arts Council Of England
- Department For Culture
- Festive Events (including Carnivals)
- Media And Sport