The loss-making Museum of Oxford has been told to prove its worth by drawing up a three-year business plan.

Lord Mayor of Oxford Bob Price with museum curator Jackie Hunt

The museum, which is part of the Town Hall in St Aldate's, is the city's only historical exhibition charting the development of Oxford, but is costing the authority £161,000 a year to stay afloat.

City councillors were close to pulling the plug on the 30-year-old museum next year in an effort to save cash, but have instead told those behind the project to draw up a plan to show how costs can be slashed and extra income generated.

Advisers think the museum is poorly located and given little publicity. They will now set about trying to devise an effective marketing plan.

City council leader Alex Hollingsworth said: "We have run the museum as a tight ship, but museums don't make money.

"The Museum of Oxford will never make a profit, and closing it was a serious option, but having a much improved museum will mean more visitors and less subsidy.

"It's the only place that makes available the history of our city and its people."

The museum displays artefacts from across the city including collections of documents, plates and arms from the medieval and Civil War periods. There is also an extensive Oxford University exhibition.

Councillors have agreed to give the museum the benefit of doubt after hearing that closing it would only provide savings of £3,000 in 2006/07 and £150,000 in 2007/08.

They also feared closure would have a harmful effect on tourism and on ambitious plans to renovate the Town Hall, potentially prejudicing bids for Lottery money.

City councillor Mary Clarkson, executive member for culture, said: "There are more than 1,000 years of Oxford's history in the museum and we want it to be a respected learning service for schools, families, foreign students and tourists.

"It's a valued resource for the local community and an essential starting point for any visitor to the city."

She added: "The museum will also develop longer term plans to look at new locations and seek to develop partnerships with other organisations in Oxford."