For the past five years campaigners have been trying to turn the National Picture Theatre on Beverley Road, in Hull, which was wrecked in a raid in 1941, into a memorial and educational resource.
Hull Council has put up funds to buy the building, but has been unable to strike a deal with the owner.
The owner is now seeking permission to build an extension on the adjacent empty Swan Inn with part of the car park behind the ruins of the cinema, dividing the site with a 2m wall.
City council planners believe it is better to bring the pub, which has stood empty for years, back into use, rather than leaving it semi-derelict.
Campaigners say this would stop to their hopes of developing an educational resource for schoolchildren and a performance/memorial area.
National Civilian WW2 Memorial Trust secretary Alan Canvess said they could still put the ruins in good order – but would be limited in what else they could do. He added: “If we take on the site there has to be provision for revenue to maintain the site. Take two-thirds of it away and you have lost the performance and educational facilities.”
A 16mm film shot in the shadow of the cinema ruins entitled Monument to Charlie Chaplin and starring five youngsters from Hull will be screened at Hull Truck this Friday and Saturday.
The theatre was packed with people wanting to see Charlie Chaplin in the satire the Great Dictator when the bomb hit.
Saturday’s film will be followed by Chaplin’s full-length masterpiece.