It is the quietest week of the year at the Broadway theatre in Barking, Essex. The Christmas tree has being taken down and the auditorium is being cleared up after the organised mayhem of the panto.

It had been a good year: about 250 professional shows, audiences up by a quarter from the year before and even a financial surplus.

A few weeks ago the venue was preparing to enter the new year with vigour, buoyed by a declaration of faith from Arts Council England, which awarded it a 53% funding increase last March.

Now something like despair is in the air. Before Christmas, the cash-strapped Labour Barking and Dagenham council dropped a bombshell – it plans to end the theatre's £331,000 subsidy from April.

Karena Johnson at the Broadway theatre in Barking. Photograph: Graeme Robertson

"It was a complete shock, we were not expecting it all," said Karena Johnson, Broadway's chief executive and artistic director. "It is an incredibly shortsighted decision and in the long term will cost the council more."

The news has caused considerable consternation locally and in the arts community.

The theatre is the only professional arts venue in a deprived London borough which has more than its fair share of problems, not least the presence of the BNP which at one time held 12 council seats.

Last year the Broadway staged a season of work which addressed the BNP's rise. The party's website now has a news article which says "nationalists will be delighted" at the council's decision.

The Broadway and other arts organisations have found they present an easy target for local authorities having to make swingeing budget cuts.

Last year, Artsdepot in Finchley, north London faced a similar situation when Barnet council said it was axing all of the £195,000 annual grant it gave.

Unless the council changes its mind, the trust that runs the Broadway will be wound down, staff will be made redundant and it will lose the money it gets from the arts council.

Critics say that without the theatre, Barking town centre would have little more to offer than a pub and a chicken shop.

They also question the timing, as Barking and Dagenham is one of the 2012 Olympic boroughs.

The Broadway was opened by the council seven years ago and Johnson has overseen success since arriving in 2009. "We need some good news stories in a borough which is deprived," she said.

As well as professional events – coming soon are Lee Nelson (a comedy character created by Simon Brodkin) and a one-woman theatre show by TV and film actor Louise Jameson – the theatre is used for numerous community events and has projects which help local artists and writers develop their skills.

Johnson has been heartened by many messages of support – including one from David Lan, artistic director of the Young Vic, which last year staged its production of the play Sus at the Broadway.

He condemned the council's move and said the theatre was the only place of its kind in that part of London.

"Karena is doing a really courageous, imaginative job in already very difficult circumstances.

"If it is only the rich boroughs that can support art in its many forms then you will get what Richard Eyre has called a 'cultural apartheid'," he said.

Essex-born playwright David Eldridge, whose play In Basildon opens at the Royal Court next month, also spoke in support of the Broadway.

Eldridge – from a "hardworking blue collar Romford family" – told the Guardian: "I feel passionately it's very important that at a time of economic hardship the arts continue to serve, not just the wealthy middle classes of London's more affluent boroughs but the decent, ordinary and hardworking people of boroughs like Barking & Dagenham."

He added: "The Broadway is Barking & Dagenham's only theatre and its doors need to remain firmly open."

The Broadway had already had its budget cut and Johnson said everyone involved with it had been realistic and were preparing for further cuts – the mood music was that the council was "very pleased with our performance".

The council says the venue will remain open, not least because there is a contract with the local further education college to use the space.

It said it recognised the value of having a theatre but was being forced to make "unprecedented savings".

A statement said: "We can't leave things as they are; the theatre has got to take its fair share of the budget cuts.

"We are confident that there will still be a professional theatre programme presented at the Broadway; however, it is inevitable that with less funding available there will be a reduction in the number and type of shows that will be put on.

"Although the number of shows may go down, this will provide an opportunity to provide more opportunities for local people to perform at the theatre and to attend a wider programme of participatory arts activities than is currently available."

Moira Sinclair, in charge of London for Arts Council England, said the Broadway had been offered more money "because we believe it is an important venue for audiences in outer London".

She added: "This funding was awarded to Barking Broadway theatre trust on the condition that they would be able to put a high quality artistic programme in place and had a viable business plan to support this.

"If the trust is unable to operate its business because of the local authority decision we would therefore be unable to award a grant to them."

In the Broadway theatre cafe, friends Linda Petrosino and Jenny Williamson discussed the decision. Both live locally and visit regularly.

"It is a real shame," said Petrosino. "There's nowhere else in Barking I can go. I'm a retired woman on my own and I can come here on my own. I feel comfortable. I know a lot of women who do that." Petrosino also volunteers front of house. "To go all the way into the West End at night is not an option for me," she said.

Williamson, who brings her grandchildren to performances aimed at younger age groups, said the Broadway was vital.

"There's no cinema in Barking, it is the only entertainment," she said. "Losing it would be a real shame and I don't understand it. In the scheme of things what they are talking about is not a lot of money."