The long-term proposals for Hay Castle in Hay-on-Wye would allow it to open to the public for the first time.
Hay Castle Trust has been awarded £528,600 to help develop the plans which include an arts centre.
The castle was built in the late 12th Century by the powerful Norman Lord William de Braose.
It was sacked the following century and rebuilt by Henry III.
Castle House, the adjoining Jacobean mansion, was built in 1660 but was severely damaged by fire in 1939 and 1977.
The castle has been owned by Richard Booth, the man credited with transforming Hay into a global attraction for second-hand book lovers, but was purchased in 2011 by the Hay Castle Trust.
The Heritage Lottery Fund said the grant would help the trust to develop its plans.
It eventually hopes to secure more than £4.8m to put towards proposals which include conserving the medieval and Jacobean buildings, and creating a new centre for arts and culture.
A medieval castle which stands over a Powys town is to receive more than £500,000 as part of plans to restore it.