The decision, made this week by the council's leisure and arts committee, resulted from a 12 to six vote.
The Millpool project working party had been looking at a consultants' study of the £5.5 million project, and at a recent meeting had been given a presentation from representatives of the experts, Chadwick Jones Associates.
Councillors felt it was not possible to obtain grants to meet the finance needed, and on-going operational costs would be difficult to cover. The study had recognised this by recommending that an annual subsidy from Caradon of £167,000 would be necessary for at least five years. Euro Option One funding for Cornwall was felt to be one route to providing a substantial source of capital funding.
Attending the meeting was former Looe councillor, and project supporter, Jean Grimer, who was joined by a number of others who backed the scheme.
Afterwards she said she was upset that efforts by some Caradon members to have the subject deferred, until a future time, failed by a vote of ll to seven. She said efforts will continue to be made to keep the arts movement alive in Looe, and alternative sites may be considered, but with a drop in the capital and revenue costs which would be required.