Funding earmarked by the government for the multi-million pound redevelopment of Penzance Harbour could be at risk if the scheme is delayed further, according to Cornwall Council.

Plans for the construction of a new passenger and freight terminal building as part of a wider project to improve the sea link with the Isles of Scilly were scrapped in June following opposition from local residents, who were concerned that scheme incorporated the site of the town's Battery Rocks beach.

However, a report examining potential options for the scheme commissioned by the Route Partnership - comprising Cornwall Council, the Council of the Isles of Scilly, Penwith District Council and the Duchy of Cornwall - concluded that the plans for a new terminal building would result in the lowest operational costs.

The Department for Transport has now indicated that the project could lose out on a share of a major £44m funding package from the government if the proposals are not fully approved by February 2010.

Graeme Hicks, Cornwall Council's cabinet member for highways, transport and planning, said: "This report makes it crystal clear that these alternatives would have serious financial consequences both for the economy of the Isles of Scilly and for that of West Cornwall.

"This is a historic maritime link that has massive economic benefits for people both in Penzance and on the Islands and this independent report clearly identifies the right way to deliver this vitally important scheme."