Plans for the construction of new multi-million pound entertainment arena in the centre of Leeds, West Yorkshire, have received a boost after the government agreed to help fund the scheme.

Yorkshire Forward, the regional development agency, has confirmed that it will invest in Leeds City Council's (LCC) proposals for the 12,500-seat venue, despite concerns that the project will threaten the future of the 13,000-seat Sheffield Arena. Tom Riordan, chief executive of Yorkshire Forward, said: "Following extensive, independent evaluation I'm pleased to confirm that Yorkshire Forward's board has confirmed its decision to invest in the development of a Leeds Arena. The proposal will now be submitted to central government for funding approval.

"The board took account of the concerns expressed by partners in Sheffield in reaching their decision, and will include these representations in the case that will now go to Government to approve the investment." Andrew Carter, LCC joint leader, welcomed the decision: "With the continuing support of Yorkshire Forward, the development of the Leeds Arena will bring world class entertainment and provide long term economic benefits to Leeds and the wider city region."

The new £30m arena is set to be built on the 5.1-acre (2.06-hectare) Claypit Lane site and will be delivered by the council itself after it was deemed that two bids from prospective developers were too expensive. However, concerns were raised Sheffield International Venues (SIV) in November last year that the new Leeds Arena, which will be operated by SMG Europe, will threaten the viability of the Sheffield venue.

SIV chief executive Steve Brailey said: "I could understand Leeds residents and the council wanting their own arena, and if they use council funds in this way, Sheffield would have to accept it. "But we object if Yorkshire Forward is helping to fund the project. They should not be funding an investment in one part of our region that will seriously damage the business of an existing venue."