Arts Council England has awarded the historic venue a £431,723 grant from its Small Capital Grants Scheme.
The gallery is one of 28 successful applicants from across the country to share in a £9.6 million pot.
The funding will be used in addition to £750,000 of borrowing from the council's capital budget - which will be paid back by income generated from the new café - and a £65,000 grant from the Department for Culture, Media & Sport's Wolfson Gallery Improvement Fund to make improvements to the building.
Works on the Lichfield Street gallery include relocating the café from the top floor to a larger ground floor space and improvements to the St Peter's Gardens entrance and disabled access, as well as the creation of larger and more flexible exhibition spaces to attract major touring shows and provide hire space.
The first phase of the works is expected to take place between autumn 2017 and spring 2018.
Councillor John Reynolds, City of Wolverhampton Council Cabinet Member for City Economy, said: "This is a great endorsement from Arts Council England for our improvement plans.
"There are a number of partners involved in the project and this announcement takes us a step closer to putting in place funding for the full scheme of internal works.
"We plan to open up the first-floor space to attract bigger touring exhibitions, like the Natural History Museum's Wildlife Photographer of the Year. That means we can move the popular café to the ground floor to create a better space to cater for more people.
"It's all about enhancing the experience and getting more people through the door to enjoy the variety of arts and events at our gallery - and is another element in the city's ambitious regeneration and inward investment plans."
If further external funding bids to the Heritage Lottery Fund and the Department for Communities and Local Government are successful improvements to the ground floor educational, learning and hire spaces will be carried out, as well as the creation of a new shop area.
The capital funding announcement follows a separate £671,000 grant from Arts Council England to the gallery last month, which made it a National Portfolio Organisation for the next 4 years.
It is one of 831 organisations that will receive a slice of £1.6 billion between 2018 and 2022 to bring new energy to the arts and cultural sector in a bid to reach more people in more places than ever before.
- released: Tuesday 18 July, 2017