But they have given the Friends of Dudley Hippodrome to the end of the month to address the authority's concerns about the group's proposal.
Dudley Council said it will now push ahead with plans to knock down the building on Castle Hill and replace it with a public square with a planning application due to be submitted in the summer.
The council said that following advice from independent consultants it believed the business plan remained 'unviable' after it was found to lack detail on market analysis, funding plans and operational issues such as staffing levels. But council bosses have vowed to 'leave the door open' on any future alternatives.
Councillor Khurshid Ahmed, cabinet member for planning and economic development, said:"We are now working on a detailed planning application for the site which will include demolishing it and replacing it with a modern public exhibition and events open space.
"If planning permission is approved this will not only create a bright and vibrant open space for community use, but will open up stunning views of our nationally renowned Dudley Castle and Zoo as people enter Dudley."
Council leader Pete Lowe said:"Following advice from specialist independent consultants the business plan submitted to us is unviable. We will be continuing with our proposals for this site, however, we will also be continuing discussions with community leaders and interested parties over possible alternatives for the site. My door will continue to be open for any viable suggestions.
"It is important that this moves towards a conclusion so I am asking the Friends group to see if they can address the shortcomings raised in their business plan by the end of February. However, I will continue to be proactive in this area and already have dates in my diary to speak to people about the future of the building."