Hopes of a multi-million-pound lottery windfall for Ipswich Museum have been dashed – forcing borough chiefs to reconsider the ambitious £23m project to transform the High Street campus.

Officials at the borough were dealt the devastating blow on the day that the National Trust learned it would be getting £1.4m from the Heritage Lottery Fund to help fund a £2.4m development of its site at Sutton Hoo.

The borough had bid for £4.8m towards the total cost of the development, but will now reconsider its options. It still has bids in to the Arts Council and the New Anglia Local Enterprise Partnership for a similar amount and hopes to hear the result of those in spring next year.

The borough itself has pledged £6.75m for the project, which would link the museum, the former art school and the High Street Gallery into a single centre under the banner I-AM (Ipswich Arts and Museums).

Now its officers are to consider whether to go ahead with the original project, or reconsider the plans to come up with a less ambitious development.

Museums portfolio-holder Carole Jones said: “This is very disappointing but we will now sit down and review our position because we believe the project is incredibly important both in economic and cultural terms for Ipswich and Suffolk. We are down but definitely not out!

“We are waiting for feedback from the HLF and we are naturally disappointed.

“However, the HLF has invested in Ipswich, with grants to Christchurch and Holywells parks and, just recently, a development grant to revive Broomhill pool, a project also supported financially by the borough council.

“We also welcome the funding award made to Sutton Hoo, a national treasure in all senses and a close partner of our Museums Service.

“We have an excellent project team in place and are proud of what we have achieved: we continue to gain valuable information about the cultural aspirations of our town and county.

“We know that Ipswich expects and needs a national heritage attraction and we believe I-AM is that attraction. Now, we must decide on the way ahead, the scale of the project and the funding strategy in the light of the HLF decision, and we look forward to positive discussions ahead.”

Ipswich MP Ben Gummer was disappointed to hear the news – but said it was important for the council to look at why the bid had failed before taking any further decisions.

He said: “It is sad news and I am sorry for all the people who put a lot of work into the bid. The borough now has to go back and learn from this and come up with another proposal for this very important building in the town.”