A £17 million bid to revamp Bolton's museum, art gallery and aquarium has been scrapped after Lottery funding was diverted to pay for the London Olympics.

Council bosses had been preparing a bid to the Heritage Lottery Fund to help cover the cost of the museum work.

It was to be developed as part of the Cultural Quarter being planned around a newly pedestrianised Le Mans Crescent.

But the maximum possible grant has now been capped at £1 million because the Government has diverted Lottery cash to cover the overspending on the 2012 Olympics.

Plans for the building in Le Mans Crescent had included: l Expanding the first-floor museum and art gallery to the ground floor which is currently occupied by Bolton Central Library.

l Moving the library to a new knowledge centre shared with the University of Bolton.

l Expanding and modernising Bolton Aquarium.

l Refurbishing the basement lecture theatre, including new seating.

l Improving lighting and humidity in the art gallery to help preserve exhibits.

The plans also included a creative arts centre for performances and exhibitions, and studios and workshops at a site still to be decided.

The council spent years working on the Lottery funding.

But the setback means it has downgraded the bid to just £900,000 and limited improvements to the museum's social history gallery.

Deborah Dunleavy, Conservative Prospective Parliamentary Candidate for Bolton North-east, said: "This will have a devastating effect on the proposed regeneration of our town centre and the development of the Cultural Quarter.

"Gordon Brown has snatched the carpet from underneath our bid and reduced the funding to a mere fraction of what it was."

Details of the setback emerged after Conservative leader David Cameron launched a campaign to free the Lottery from Government interference and preserve an extra £182 million for the arts, sports, heritage and charities.

It had been feared that a huge escalation in costs for the Olympics - estimated at about £9 billion, from an initial figure of £2.35 billion - would mean developments and projects in towns such as Bolton would suffer. But the extent of the problem has only recently become known.

If the £900,000 bid is successful, a new exhibition will be launched at the museum telling the story of Bolton, while there will be more space to display photographs from the 1937 Mass Observation Project which show people going about their daily lives.

Cllr Ismail Ibrahim, the council's executive member for culture, said: "What we can do with £900,000 is far from the expectations, so councillors are disappointed.

"The cultural quarter was going to change the whole dynamic of the area. The museum improvements fitted into that."

Bolton's Liberal Democrat leader, Cllr Roger Hayes, said: "It's extremely disappointing and very annoying. We were led to believe that other areas of the country wouldn't lose out because of the Olympics but it seems to be costing us a lot more than expected and we aren't seeing the benefits in our part of the country."

The council's director of development, Keith Davies, said: "It is frustrating and we are disappointed because we had spent two or three years on the bid."

But Mr Davies said the setback did not spell the end for the plans.

He said more Lottery cash could be available after 2012 and that he hoped the Cultural Quarter proposals could also attract private-sector investment as part of wider plans for a Bolton Innovation Zone.

The zone includes the combining Bolton Community College and Bolton Sixth Form College on one site and the concentration of the university's operations in Deane Road.

There will also be a new magistrates court, while the former Odeon Cinema in Le Mans Square is being replaced by a hotel, offices, homes and shops.

A spokesman for the Department of Culture Media and Sport, said: "The Lottery is an essential part of the Olympics funding. Without the Games, there will be no sporting legacy for the UK, no four-year celebration showcasing British culture, talent and innovation, no boost to our economy and no influx of visitors."