In its hey-day Spanish City, with its distinctive white dome, attracted thousands of visitors to Whitley Bay each year.
But it fell into disrepair in the 1990s and shut to the public in 2000.
Grade II-listed Spanish City and the Whitley Bay Pleasure Gardens opened in 1910.
A 60-bed hotel, a care home, 20 apartments and 24 town houses are also planned in a bid to help regenerate the area, the council said.
Ivor Crowther, Head of HLF North East, said: "This iconic building holds an incredibly special place in the hearts of all of us who live in the North East and beyond."
The grant would "unlock the potential of Spanish City", in the hope of encouraging private investment and wider regeneration.
A 103-year-old seaside tourist attraction is to be restored and reopened thanks to a £3.7m Heritage Lottery Fund (HLF) grant.