The most sweeping review of English arts funding since 1945 has resulted in nearly 200 theatres, galleries, dance groups and other cultural bodies losing essential government grants.

Dozens of community arts organisations face a struggle to survive after Arts Council England confirmed yesterday that it is severing all funding to 185 clients and reducing grants to a further 27.

The Arts Council argues that the cuts are necessary to fund 81 new organisations and projects, including Punchdrunk theatre company and contemporary music at the Barbican, and to reward thriving causes with increased support. Overall, its arts spending has risen by 9 per cent, spreading £1.3 billion between 888 organisations over three years.

Seventeen bodies that had been earmarked for cuts received an eleventh-hour reprieve, including the Bush Theatre in West London, the Northcott Theatre in Exeter and the National Student Drama Festival in Yorkshire, all of which had recruited celebrity campaigners to their cause.

Organisations that lost appeals against provisional funding decisions made in December ranged from the London Mozart Players, one of Europe’s leading chamber music orchestras, to the Anne Peaker Centre for Arts in Criminal Justice, which helps to rehabilitate prisoners.

The Arts Council denied that criticism from prominent figures such as Sir Ian McKellen, Kevin Spacey and Dame Judi Dench had influenced its verdicts but admitted to making mistakes in assessing some organisations.

The entire process has provoked an increasingly rancorous debate about the Arts Council’s role in distributing government money to the arts. Last month Nicholas Hytner, the director of the National Theatre, described the organisation’s approach as “bollocks” and a “strategic catastrophe”.

When The Times revealed last February that the Arts Council was drawing up secret plans to slash investment in many publicly funded organisations, there was broad sympathy with its thinking. At the time the arts world was braced for a real-terms cut in the council’s annual budget. Cuts to some seemed the only way to allow others to thrive.

However, when the Arts Council instead received a surprise £50 million increase in the Comprehensive Spending Review last autumn, many felt that the planned cull had become unnecessarily drastic.

Provisional funding decisions were made just before Christmas, leaving the 229 affected organisations only five weeks to appeal. The Arts Council received 126 responses from them.

Sir Christopher Frayling, chairman of the Arts Council, insisted that the 17 changed decisions, with grants totalling more than £5 million, were “not a climbdown and not a U-turn”. “No one is ever going to love us but we believe very, very strongly that it is our role to do this.” He added that the audit had been the most comprehensive since John Maynard Keynes formed the organisation in 1945.

The losers from yesterday’s review may now struggle to secure replacement funding from the private sector, according to Colin Tweedy, chief executive of the consultancy Arts & Business, which suffered a £2 million cut to its £6 million grant. He said: “What’s so dangerous about what the Arts Council is doing is that they will screw up these organisations’ relationships with their private donors because they are now labelled ‘failures’.”

Nancy Hogg, an administrator at Momentum Arts, which runs community arts projects with disadvantaged young people in Cambridge, said that the organisation’s future was now in doubt. “We hope to continue, but it’s under review. Our funding ends in April, and we don’t know what we will do.”

David Curtis, artistic director of the Orchestra of the Swan, in Stratford-upon-Avon, said: “Smaller organisations are always easier targets, and if you don’t have a major celebrity fronting your campaign you take the hits. I am extremely disapointed. The Arts Council has behaved appallingly, both nationally and locally.”

Jatinder Verma, the artistic director of Tara, a cross-cultural touring theatre company, which has lost 50 per cent of its Arts Council funding, said: “It’s like saying that Shakespeare is not for Blacks and Asians. This decision makes a mockery of the Arts Council’s commitment to celebrating diversity.”

Benedict Nightingale, The Times’s chief theatre critic, said that some of the funding decisions were to be recommended but others seemed ill considered. “While we’re all relieved by the reprieve of the Bush, which with the Royal Court is the nation’s principal new-writing theatre, there are losers who shouldn’t be losers.

“Why give a lot of new money to the Round House, which is basically a receiving house, and substantial extra support to Hampstead Theatre, which is no longer at its best – yet halve the £341,000 grant to Tara arts, a vital Asian company which recently opened its own playhouse in Wandsworth and transferred a production of The Tempest to the West End? Disgraceful!”

Jeremy Hunt, the Shadow Culture Secretary, said: “Trying to spin this as an ‘ambitious vision’ is simply a kick in the teeth for the organisations that will have to close down as a result of these decisions.”

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