He was Rome's first emperor, the founder of a world-dominating imperial dynasty, and a builder of roads and stunning temples who brought peace to a far-flung empire; a man so powerful the Roman senate named a month after him. Now, on the 2,000th anniversary of the death of the emperor Augustus, the city of Rome is getting ready to honour its favourite son by saving his mausoleum from shocking neglect.

Built in 28BC and as broad as a city block, the cylindrical mausoleum has seen better days after being sacked, bombed and built upon down the centuries. It was used as a bullfighting ring and a concert hall before it was finally abandoned, recently becoming a hangout for prostitutes and a handy toilet for tramps.

That was a sad fate for one of Rome's most significant and sacred monuments, which once stood 120ft high – topped by a 15ft bronze statue of Augustus – and housed the emperor's ashes as well as those of his successors Tiberius and Claudius. Today, as tourists flock to the Forum and the Colosseum, diners at the pizzeria across the street from Augustus's mausoleum – which lurks behind a fence in a piazza yards from Via del Corso – barely notice it.

But with €2m (£1.6m) in fresh funding, archaeologists now plan to clean up, restore and reopen the site, while the city is to spend €12m on creating a pedestrianised piazza to handle visitors.

"Augustus made Rome the world's biggest and most beautiful city, the capital for business, culture and entertainment," said Rome's culture assessor, Flavia Barca. "Not every city can celebrate a 2,000-year anniversary."

Considered to be Rome's finest emperor, Augustus defeated his rivals Antony and Cleopatra before establishing Pax Romana throughout the empire, while rebuilding Rome and setting up the city's first police and fire fighting services, claiming on his death bed: "I found a Rome of bricks; I leave to you one of marble".

The marble has long been stripped from his mausoleum, but three concentric outer walls, the widest 15ft thick and the highest 50ft tall, have stood the test of time, while an upper floor is now missing, leaving a surprisingly large open-air circular space inside where the horns and screeches of Rome's thundering traffic fade to an eerie silence.

"It's incredible the mausoleum is still standing despite what it has been through," said Elisabetta Carnabuci, one of the archaeologists charged with restoring the site.

Pillaged in 410 by Visigoths who scattered the emperors' ashes, the mausoleum was converted by the Colonna family in the 12th century into a castle, which was demolished by cannon fire during a clash with a rival family, the Orsinis. By the 16th century the site had been turned into a formal garden with a well-to-do palazzo built into the walls, before it was used for bullfights in the 18th century and then firework displays.

Large holes punched through the Roman masonry indicate the exits added when the mausoleum was converted into an elegant concert hall in 1908, becoming home to the city's main orchestra, with a domed roof added and space for 3,500 spectators drawn by conductors such as Arturo Toscanini.

But in 1936 Benito Mussolini ordered the musicians out and stripped the site down to its original Roman masonry in a bid to honour the emperor he emulated, in time for the 2,000th anniversary of Augustus's birth in 1937. Cypress trees were planted on top of the mausoleum's walls in the belief Augustus originally planted trees there, and a squat two-storey tower was erected in the open space at the heart of the mausoleum to mark the spot where the ashes were once kept.

"It was a real hack job by Mussolini's archaeologists," said Carnabuci, wrinkling her nose during a visit to the site last week. "When we get the money, that tower is going."

But Mussolini's tampering with history was nothing compared to the mausoleum's postwar fate. As stonework crumbled, the inner chamber was gated off in the 1960s before tramps congregating at a nearby soup kitchen discovered they could bed down undisturbed outside the walls.

In an attempt to restore the site in time for the 2,000th anniversary of Augustus's death in 2014, the cash-strapped city of Rome looked for a private sponsor, noting how shoemaker Tod's had stepped forward to pay for vital restoration at the Colosseum. "No one wanted to sponsor the mausoleum, and so we missed the anniversary," said Claudio Parisi Presicce, Rome's archaeology superintendent. "But with the €2m in public money now available, we can get started."

That has put off the reopening until 2016, but the city did arrange a sneak preview last weekend, and Carnabuci said the response showed Romans have not forgotten their first emperor. "There were 5,000 queuing round the block, under the rain," she said. "I was shocked, it was like a rock concert, and when the people got inside there was an awed silence."