The Hay Castle Trust has won a £528,600 development grant from the Heritage Lottery Fund, to restore the castle and open it to the public.
The grant will help develop proposals for a second stage application for more than £4.8million to complete the restoration.
The trust's plans include creating a centre for the arts, heritage education and training for the community.
The funding was announced at an event at the Hay Festival.
Speaking at the event, First Minister Carwyn Jones said: "It is with great ambition, drive and perseverance that Hay Castle Trust has succeeded in its Heritage Lottery Fund bid.
"I am pleased that this first round of funding allows the trust to start work on developing its plans to restore the building for the future enjoyment of the public."