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Public money was wasted by the Welsh government in a failed plan to turn a former hotel it bought for £1.6m into a community and martial arts centre, says a scathing watchdog's report.

Plans for the River Lodge in Llangollen, Denbighshire, included establishing the first Shaolin martial arts centre outside China.

But the Wales Audit Office said the building was not worth the money.

The Welsh government said it accepted the report and had lessons to learn.

The building, which is still vacant, has become derelict and has cost the taxpayer another £200,000 in maintenance, security and business and water rates.

A report says a key official had a conflict of interest and the site has not been used since the deal collapsed.

The former hotel was bought by the Welsh government in March 2007 with the intention of leasing it to a community group called Powys Fadog.

It planned to create a local centre for health, healing and learning and provide an estimated 15 full-time and part-time jobs within three years.

But a Wales Audit Office (WAO) inquiry found the £1.6m price was not supported by a full valuation and the evidence suggests the Welsh government paid more than the property was worth.

The Welsh government had no agreement in place with Powys Fadog and had not carried out a robust risk assessment, the WAO said.

In a report, it highlights a conflict of interest for the Welsh government official who negotiated terms with the vendor, Amanda Brewer. She is also a director and the company secretary of Powys Fadog.

The report says she has since been dismissed, but is challenging the decision at an employment tribunal.

Powys Fadog was unable to fulfil the terms of a lease agreement and five years after being bought the property is still empty.

The report says: "The Welsh government had been slow to react to external and internal concerns about the probity and value for money of its earlier decisions.

"By the time that action was eventually taken, substantial sums of public money had been spent, and much of it wasted, both on the purchase of the River Lodge and the associated costs of ownership, and to date the Welsh government has gained nothing in return for its substantial investment.

"As at May 2012, the River Lodge remains in the Welsh government's ownership and urgent action is needed to find a use for or to dispose of the property."

Paul Dimblebee, from the Wales Audit Office said: "When the Welsh government acquired the project in 2007, it did so with a price of £1.6m - that price was not supported by a full and independent valuation from the district valuer and we assessed that they paid top market price for that.

"Its sole purpose was to lease the property to Powys Fadog. But at the time of the purchase the Welsh government had no agreement in place with Powys Fadog to lease the property.

"It had not undertaken any due diligence checks on the organisation to ensure it had the financial backing to refurbish the property and pay any rents.

"And it had not identified any alternative uses for the building should the deal with Powys Fadog fail.

"It was certainly a high risk project as a consequence of them not undertaking these various steps they should have been undertaking.

"The Welsh government has had absolutely no return on its substantial investment of public money," he added.

Darren Millar, chairman of the assembly's public accounts committee, said the report "highlights a catalogue of flawed decisions - all of which were entirely avoidable - and all of which have cost the taxpayer considerable sums of money".

"I expect the Welsh government to have learned the lessons from the decisions and actions taken around the purchase of the River Lodge Hotel and the signing of the agreement for lease to Powys Fadog," he said.

The Welsh government said it accepted the report which was requested by the assembly's permanent secretary after internal reviews.

A spokesman said: "This report will help to dispel much of the misinformation relating to this project, and we welcome the recognition by the Wales Audit Office that the intervention by the permanent secretary was both prudent and necessary.

"However, we clearly accept that there are a number of lessons for us to learn relating to the acquisition of River Lodge and the subsequent management of the project, and have significantly strengthened and improved our governance arrangements and managerial systems to minimise the risk of these issues from occurring in the future."