The merger of NewAlliance and First Niagara banks earlier this year cut deeply into the local economy, eliminating jobs at what had been downtown’s biggest employer and raising more worries about the future of an already struggling Main Street.

“The challenges ahead for our downtown are significant,” Tana Parseliti, manager of the Downtown Manchester Special Services District, said at a hearing on the merger in March. “The employment loss and shift of identify from regional banking hub to a branch location strongly points to a need for ongoing support for the economic repositioning of downtown Manchester.”

On Wednesday, that repositioning advanced with a $1.3 million gift package from First Niagara to the town and Manchester Community College. First Niagara will give the building at 903 Main St. to the town, along with $500,000 to the community college’s foundation, officials announced. The town in turn will allow the college to use the building as a downtown satellite.

Bank officials recognized that Main Street needed a boost after the merger, and they also learned that the college needed more space, First Niagara Executive Vice President Frank Polino said. He said he first suggested selling the building to the town at a discount, but the bank’s chief executive, John R. Koelmel, said, ” ‘Let’s give it to them for free,’ ” Polino said.

Representatives of the bank, the town and the college all said the move will invigorate downtown, adding foot traffic and business patronage from students and visitors to art exhibits, performances and other college-hosted events.

“We really see it as a catalyst, a spark, a seed,” Parseliti said Wednesday after the formal announcement in the Lincoln Center hearing room.

The college plans to open an art gallery on the main floor in January, MCC President Gena Glickman said. Four classrooms that could serve as many as 200 students a day also are planned, along with space to host events and possibly an Internet cafe, Glickman said.

The MCC campus is on the town’s southwestern edge below I-384, and Glickman said she was thrilled at having a presence in the heart of Manchester.

“This is like a dream come true,” she told the audience at Lincoln Center. “We are going to be a college town.”

The 1898 Colonial Revival-style building is best known as the former home of the Regal Men’s Shop, which occupied 16,000 square feet on two floors from 1941 to 2001. The Savings Bank of Manchester (which became part of NewAlliance) bought the building in 2001 and did a thorough renovation, according to Roland Graziani, facilities and project manager for First Niagara. About 15 First Niagara employees who now work in the building will move to the bank’s other downtown locations, bank officials said.

Town General Manager Scott Shanley said the building is in good condition, but upgrades will be needed before classrooms can be included. First Niagara’s $500,000 gift will be used for capital improvements and operating costs, but more money will have to be raised to complete upgrades and changes estimated to cost a total of $2.9 million, Glickman said.

The first steps will be to remove offices at the front of the main floor, opening that space for the planned art gallery, Shanley said. Also, awnings in the front will be removed, he said. The town will likely close the deal to acquire the building in December, he said.