The new Sherman Cymru theatre is due to open in summer 2011 - impression by Jonathan Adams of Capita Architecture
Cardiff's Sherman Cymru has been awarded a £3.9m lottery grant to help transform its theatre.
The money from Arts Council of Wales will meet nearly three-quarters of the £5.4m redevelopment cost.
The public and backstage areas will be modernised, improving conditions for audience, staff and performers.
Chris Ricketts, director of Sherman Cymru, said: "This is really great news and we're delighted with Arts Council of Wales' support.
"The building work we will be able to do will vastly improve facilities, enhance our profile within the city and really enable us to be more ambitious with the productions we create and the performances we programme."
The foyer will be modernised as part of the redevelopment plan
The redeveloped and refurbished building will have new seating in both theatres, new toilet facilities and the redevelopment of the foyer areas including improved access.
Backstage areas will be redeveloped to improve rehearsal and office space enabling enhancement to the quality of the work.
The building is being designed by Jonathan Adams at Capita Architecture, who also designed the Wales Millennium Centre.
The current building, opened in 1973 in Senghennydd Road, Cathays, as part of the then University College Cardiff, is currently leased to the Sherman Cymru company by the Arts Council of Wales.
Sherman Cymru was formed in 2007 by a merger of the existing Sherman Theatre company with Sgript Cymru, the national company for new writing.
Emyr Jenkins, chairman of Sherman Cymru, said: "Our redevelopment plans are aimed to give the capital city of Wales' only producing theatre the venue it, and its audience, deserves - something of which we can all be proud."
Actors Rhian Morgan and Ciaran McIntyre appeared in Deep Cut
Sherman Cymru produces several new productions a year, including the award-winning Deep Cut.
Based on the real-life controversy over a series of deaths of young soldiers at an army barracks, Philip Ralph's play was a hit at the Edinburgh Festival Fringe in 2008, before transferring to the Tricycle Theatre in London.
Sherman Cymru staff have also worked in projects with asylum seekers, refugees, and almost 7,000 young people in the past year through the Youth Theatre and Acting Out Cardiff scheme which allows 14-16 year olds to study for a BTEC in Performing Arts.
Nick Capaldi, Arts Council of Wales Chief Executive, said: "Sherman's contribution to the cultural life of Wales is longstanding and well established. We're delighted to be making this significant investment of funding in the theatre's future.
"Sherman Cymru is already one of the country's most important theatre producers. It's essential that it has the quality of facilities to match."
The Sherman Theatre opened in 1973 as part of University College Cardiff
The theatre aims to raise the remaining £1.5 million needed for the scheme from a range of sources and has begun discussions with a variety of potential funders.
A public campaign for individual donations will be launched in September and fundraising activities include Sherman Cymru staff members running the Cardiff Half Marathon.
The current Sherman building will close its doors for the 18 month refurbishment in January 2010 following a production of A Christmas Carol.
Sherman Cymru will move to temporary offices in Cardiff and continue to produce and tour theatre around the UK, and maintain its learning and engagement work.