The funds, approved by the National Lottery and Historic Environment Scotland, will allow improvements to be made to historic buildings and public spaces.
The project will take place over five years, with initial works including widening the pavement and reducing the width of the road on the junction of High Street, West Street and The Square.
Midlothian Council will work with local groups including Penicuik Community Development Trust and Penicuik First during the project.
The council has already committed to investing £460,000 in street improvements in Penicuik High Street, with work expected to start on site in the autumn.
Midlothian Council's cabinet member for communities, Councillor Russell Imrie, said: "We are delighted that our applications for funding support from the Heritage Lottery Fund and Historic Environment Scotland have been confirmed.
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"This will allow the council and its partners to make an early start on improvements to Penicuik's historic town centre, and we look forward to working with local residents, property owners and businesses on this exciting regeneration project."
The National Lottery also awarded £1.7m towards the project.
Lucy Casot, Head of the Heritage Lottery Fund in Scotland, said: "Investment like this goes well beyond the bricks and mortar of any building. It can really help turn local economies around, not only by improving how they look and feel for residents and visitors, but by creating new jobs and training opportunities. It will be wonderful to see new life breathed into Penicuik's historic heart and it's thanks to National Lottery players that we can help make it happen."
Thomas Knowles, Head of Grants at Historic Environment Scotland, added: "We are pleased to support the Penicuik Regeneration Project through our Conservation Area Scheme funding programme. This will provide £980,000 of investment to support the regeneration of the town which includes delivering grants schemes available to local residents and business owners to improve key historic buildings and public spaces."
Information on how property owners and businesses in the project area can apply for grants to restore their buildings or shopfronts will be published within the next few weeks on the council's website.
(CM/MH)
