More than 120 arts groups are to lose their state funding under a tough settlement announced by the Arts Council to secure the future of England's major theatres, orchestras and dance companies.
The Arts Council's distribution of grants to more than 1,100 bodies from the National Theatre to the Royal Opera House came after three months' agonising over its plans.
The Government announced in December that it would freeze the Arts Council's budget at £412m for the next three years.
As a result the Arts Council is slashing its own administration costs, slowing down the roll-out of major education schemes like Creative Partnerships and cutting funding to 121 organisations previously supported to pay for inflation increases for most of its clients.
Sir Christopher Frayling, its chairman, warned that he had not been able to reward excellence and was unable to capitalise on the momentum which had been achieved after five years' investment in the arts by the Government.
The Arts Council would not be able to juggle the figures successfully again, he said. "We hope we've mitigated the effects of the bad settlement. But the things we announce today are not sustainable beyond 2008. Much will depend on the arts receiving a better settlement from Government in 2006."
However, Kim Evans, acting chief executive, said the grants would be good news for many. The majority would receive a standard annual increase of 2.75 per cent. More than 230 would receive more than that, with the Lowry in Manchester, for instance, receiving a 1,233 per cent rise over three years.
"But we were really determined not to deliver equal misery for all [so] there have to be some losers," she said.
Fifty-four bodies, from the Crafts Council to the St Paul's Carnival in Bristol, are receiving less than inflation.
Phil Simmons, director of Yorkshire Art Circus, which runs writing projects in the Wakefield area, said it was "astonished" by the decision to end its grant. "It will be a very big blow indeed. I can't see any technical or artistic judgement for this," he said.
The mood in most of the arts was of muted relief after fears that the freeze would destroy the progress that has been made in recent years. But leader after leader stepped forward to call for more government support next time.
Ruth Mackenzie, a former government special adviser who now runs Chichester Festival Theatre, said: "The Arts Council have made the best of a bad job. But they have cut the people who can't shout. They have cut community arts and young artists who might turn out to be tomorrow's major artists. And it is really tragic to have cut back on Creative Partnerships, which is targeted at the most deprived young people."
Nicholas Hytner, artistic director of the National Theatre, said the theatre had done as well as it had a right to expect under difficult circumstances. But he warned that it would be a challenge to maintain its existing programme and keep ticket prices low.
Vikki Heywood, executive director of the Royal Shakespeare Company, was pleased its grant meant it could go ahead with its planned festival of the complete works of Shakespeare. But she said: "We need to make a strong case to Government by the next spending review that makes it clear investment in the arts is not just the icing on the cake."
Russell Jones, director of the Association of British Orchestras, said most of its members had received around- inflation increases, with the exception of orchestras in Guildford and Milton Keynes, whose funding was axed. But he said: "If the Government were to do this again, we would see real hardship because you can't magic rabbits out of hats two spending rounds running. This will not be sustainable."
Government insiders stressed that the Arts Council settlement was by no means the disaster that had been claimed and has been boosted by the Chancellor's announcement in the Budget of an extra £12m funding for leadership training in the culture sector.
Losing its £61,000 grant in two years' time will leave the Brewhouse arts centre in Taunton in a "desperate" situation.
With a 352-seat auditorium, two art galleries, and educational workshops, the Brewhouse presents West End transfers, classic theatre by repertory companies, music and comedy. More than 150,000 people, from Dorchester to the south to Bristol in the north, used the centre last year.
Glenys Gill, its artistic director, said: "We've known that government cuts were probably coming, but we didn't know that we would be completely dumped. We've got two years to review the situation but it's going to be very hard. With the Black Swan arts venue in Frome also losing its grant, what is going to happen to visual arts in Somerset?
"We have a strong educational and outreach department, an important facility for young people. If we don't attract them, we're losing future audiences. It's a desperate situation."
With its main home closed for rebuilding at a cost of £12m, the Young Vic and its programme of classical and contemporary plays, starring big names such as Jude Law, is operating in other venues. But the theatre is due to reopen in the autumn of 2006 with a larger main auditorium of around 500 seats and two studio spaces.
Under the new deal, its grant in the next financial year of £956,000 will rise to £1.34m the following year. The following year, 2007-08, it will receive £1.47m.
David Lan, the Young Vic's artistic director, said: "It's extremely good for us. We have been extremely well supported both financially and in terms of encouragement by the Arts Council for a while now.
"What's good about this is that they have understood that when people move into a new building, they generally need a little increase in funding to run the building as well as it can be run. They have really endorsed what we have been doing - though we still have to raise £750,000 for the building."