Rothesay's down-at-heel appeal has always been part of its charm.

Even in its 1930s heyday as the most popular Scottish holiday resort, the tens of thousands of visitors who travelled "doon the watter" each summer by paddle steamer enjoyed the shabby chic of its cast iron Victorian Winter Gardens, glass-and-steel rain shelter and much-admired Victorian restrooms.

But even their recent restoration, and the re-organisation of the famous waterfront to include a raft of smart new pontoons for sailing boats, has not masked the glaring deterioration of Guildford Square, the once-elegant 19th-century space that faces the pretty 19th century pier and abuts the town's medieval royal castle.

Once-sparking white stucco is now stained and cracked, and there are raw gable ends. An amusement arcade sits behind the newly refurbished Esplanade Hotel, while a string of pubs, an Oxfam shop and a tatty gift shop sit alongside two houses for sale.

All that is set to change, however, with yesterday's announcement that £1.5m has been earmarked by the Heritage Lottery Fund to help turn around Rothesay's fading fortunes and, specifically, Guildford Square. The first round of development funding of £50,000, to be used to create a developed application to secure the full award, has been awarded to the town through the fund's Townscape Heritage Initiative (THI).

Campbeltown is to receive £700,000 from the THI to restore its town hall for community use and to repair and restore the Old Schoolhouse as a hostel for tourists. THI has in the past awarded £1.6m to Glasgow's Merchant City, which helped refurbish and transform the City Halls/Fruitmarket complex.

For Rothesay's Guildford Square, the money is to be used to restore architectural features and listed buildings, find new uses for derelict buildings, and construct new buildings in vacant spaces.

A spokeswoman for Argyll & Bute Council stressed: "Priority will be given to the gap site in Guildford Square, where new buildings will be designed and constructed that will suit the character of the area."

Councillor Len Scoullar, chair of the Rothesay Waterfront Project Board, said: "This is wonderful news not just for Rothesay but for the entire Bute community, which is of course 100% behind the plans.

"We have some wonderful historic buildings in Rothesay, and Guildford Square is right at he heart of them. It is very exciting that these former jewels in the town's crown look set to be restored to their former glory, and we all look forward to ensuring that Rothesay regains its reputation as one of Scotland's most beautiful and most popular visitor destinations."

Elizabeth Rennie, who has lived on Bute for 30 years, also welcomed the news. "Some parts of Rothesay have been neglected for years, and Guildford Square is one of them. It look alright on winter nights because there are lights in the trees, but in the cold light of day you see the deterioration."

But it may not be as straightforward as it looks. Craig Borland, editor of The Buteman, said: "There are certain areas of the town that need to be looked at quite seriously and although Rothesay already looks much better than it did even last year, there is still a lot to be done.

"This funding should go some way towards addressing the issues that are still outstanding. Empty and derelict buildings are one of the major problems and trying to ascertain who owns them may be difficult, as many have multi-ownership."

Jemima Patrick, who owned the Argyll Bar close to Guildford Square for 25 years until she sold it last year, believes it would be "a shame" if the town were to be gentrified too much.

"I know it's a bit run-down but it's a super place to be and I love it just the way it is," she said yesterday. "We all know it's needing a bit of money spent on it. The back streets are just getting worse and worse.

"But most people who live here adore it. We wouldn't want it to change too much. This is a place where maw, paw and the weans used to come for their holidays. Now they go to Spain. We need to find a way of bringing them back here, to make it the place it once was." Seaside charm and celebrity

Rothesay, Isle of Bute Baile Bhòid in Gaelic is the principal town on the Isle of Bute. Population: 6000 Grew as a popular tourist destination during the Victorian Era for holiday makers enjoying the quiet beaches and seaside charm. The island town was immensely popular with Glaswegians. The 13th-century Rothesay Castle is the highlight of the town centre, unique in Scotland for its circular facade and moat. It saw a 49% increase in tourist visits in 2007-08 compared with the year before. The heir to the British throne is known as the Duke of Rothesay in Scotland, similar to the Duke of Cornwall in England. Famous Bute people include film director Lord Attenborough, who has made a home on the island; singer Lena Zavaroni, who was born and grew up in Rothesay; and Bob Winter, Glasgow's current Lord Provost. Once the whisky capital of the world'

Campbeltown Ceann Loch Chille Chiarain in Gaelic.

Population 5000. The town is a former royal burgh located by Campbeltown Loch on the Kintyre peninsula. Originally known as Kinlochkilkerran. Grew after the 17th century as a busy fishing port, later becoming a centre for shipbuilding and whisky production with 34 single malt distilleries at its peak. Home of the famous Campbeltown Single Malts, Cambeltown is one of the distinct whisky-producing regions in Scotland. Once known as "the whisky capital of the world", only three active distilleries remain. Hometown to Sir William Mackinnon, the Scottish ship-owner and businessman, James C Russell, Moderator of the General Assembly of the Church of Scotland.