Exeter's Northcott Theatre which is reopening after a £2.1m revamp may have to close after being told its Arts Council grant could be withdrawn.
The redeveloped theatre was only handed over by contractors last Friday.
But the Arts Council has recommended not continuing its £547,000 grant from April 2009 - which would remove about a third of the theatre's income.
Theatre bosses said there is a real possibility the theatre could be forced to close with the loss of 58 jobs.
"It's a knife edge for us in business terms "
Nick Capaldi, executive director of Arts Council England South West said the recommendation "was not made lightly".
He said: "Our letter to the Northcott explains that the theatre can respond to our recommendation and that our regional council will take its response into account before making a final funding decision in the New Year.
"We had no indication they were going to take this money away - we've had no discussion with them at all"
"Over the past year, we have made it clear to the Northcott that we had concerns in a number of areas. We offered funding towards the refurbishment believing that those concerns would be addressed but unfortunately they remain."
But acting chief executive Clarrie Middleton says they have been working to address the Arts Council's concerns and the news came out of the blue.
"It's a knife edge for us in business terms and we had no indication they were going to take this money away - we've had no discussion with them at all," she said.
The theatre closed its doors on 20 January to allow the work to be carried out, with improvements including essential works to comply with health and safety and the Disability Discrimination Act.
As well as the Arts Council England South West, funding partners for the £2.2m programme included Exeter City Council, Devon County council and Exeter University.
The theatre opens it doors again on Wednesday with the start of the Christmas pantomime Cinderella.
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