Dolmynach House contained a treasure trove of artefacts
Council leaders admit they are "embarrassed" after finding boxes of jewellery - five years after they reported them missing to police.
The rings, brooches and necklaces were part of Rhayader's Dolmynach House collection, left to Powys council by Leila Williams after her death in 1994.
The authority reported them lost after they were taken to county hall in Llandrindod Wells for cataloguing.
But the jewellery was discovered in a strong room during an office move.
After the jewellery was reported missing five years ago, an inquiry by the council and Dyfed-Powys Police concluded it had been misplaced.
The council launched a fresh inquiry in 2007, but the items could not be found.
The jewellery, part of a legacy bequeathed by the late Leila Williams, was lost after being taken to county hall in Llandrindod Wells for cataloguing, said council officials.
It was placed in a strong-room for safe-keeping and later reported missing.
The jewellery was finally spotted in a strong-room at the Gwalia offices in Llandrindod Wells last week during office moves.
Lloyd Lewis, Miss Williams' second cousin and chairman of Dolmynach Community Trust, criticised the council's handling of the situation.
"I think the council's handling of this has been appalling," he said.
"I was gobsmacked when I heard the jewellery had been found but very pleased, too.
"The council said it was found in the Gwalia but over the years we were told officials had searched all their buildings."
Council chairman David Price presented the five boxes of jewellery to Dolmynach Community Trust last Friday.
"We are delighted if a little surprised that the jewellery was found in the Gwalia," said Councillor Price.
"It is a bit embarrassing that the jewels were with the council all along, but the most important thing is that they have been found and reunited with the remainder of the legacy.
"When they went missing there was an internal inquiry and police were called in to investigate. They concluded there was no evidence of theft and that the most likely explanation was that the items were simply misplaced."
Dolmynach House contained a treasure trove of artefacts dating back to the early 1890s when it was built by Miss Williams' grandfather, Rhys Edward Lewis.
A second Victorian home, and another property dating from the 17th Century, all thought to be worth about £500,000 in total, were also left to the council by Miss Williams.