The Heritage Lottery Fund has confirmed its initial support for the transformation of HMS Caroline.
The money will enable the National Museum of the Royal Navy to draw up more detailed plans to bid for a full grant of £12.2m.
The project aims to preserve the ship and more than 450 objects.
Visitors will be able to learn about the history of the ship, her 300-strong crew and key milestones of her service, the links to Belfast and the city's industrial heritage.
The head of Heritage Lottery Fund in Northern Ireland, Paul Mullan, said:
"These exciting proposals to preserve and transform this hugely important heritage asset into a world-class heritage experience will undoubtedly add to, and complement the current offering at the Titanic Quarter.HMS Caroline is the last remaining warship of the Royal Navy's Grand Fleet which fought at the Battle of Jutland in 1916.
It will also provide a tremendous boost for the local economy with the opportunity to secure more than £12m in lottery funding, which would be HLF's largest single award in Northern Ireland.
With development funding and our initial support in place the project can progress to the next stage of the funding process. The hard work will now begin to develop more detailed proposals which will bring the project to life and set out how it will deliver real benefits for local people, the economy and the heritage."
A light cruiser, weighing 3,750 tons and 446ft long, it holds the record for the fastest build time of any major warship.
Constructed in 1914, the ship is one of only 200 vessels in the National Historic Fleet.
Caroline will be berthed at the Alexandra Dock in Belfast and will be conserved alongside the listed Pump House, to serve as a visitor centre and gateway to the ship.
Exhibition space within the 120-year-old Pump House will be used to link the heritage of HMS Caroline with the Pump House and other surrounding maritime assets such as Thompson Dock.
A series of workshops, events and activities, both on the ship and through a dedicated outreach programme, will help to involve communities with the project.
The HLF said partnerships with colleges would also be explored to secure additional learning opportunities for students of history, construction, engineering and tourism.
The NI Minister for Enterprise, Trade & Investment, Mrs Arlene Foster MLA, said the announcement of support by the HLF brought plans to have HMS Caroline
"restored and preserved for future generations one step closer. Over the last year, there has been a significant effort, from myself and others, to find a solution to keeping HMS Caroline here. We have developed a strong partnership with the National Museum of the Royal Navy.Captain John Rees OBE RN, National Museum of the Royal Navy chief of staff and senior responsible owner of the HMS Caroline restoration programme, said he was relieved that work could now begin on the project:
This partnership will continue as we restore the ship. HMS Caroline has become part of the city's rich maritime heritage. Its restoration in the Alexander Dock will complement and enhance our tourism offer in the city and protect a heritage asset of local and national importance.
Our ultimate aim is to transform the ship into a world-class floating museum in time for the Battle of Jutland centenary in 2016, as I believe HMS Caroline has huge potential as a visitor experience."
"We are very grateful to the Heritage Lottery Fund for the certainty they have given to the future of this immensely important vessel. HMS Caroline is quite simply one of the most significant historic fighting ships in the world, second only to HMS Victory, and to restore the ship and open it to the public as a shared space, museum and cultural hub in Belfast means the city will benefit hugely from its presence."
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