An Italian businessman has won a state auction to lease a picturesque but haunted island in the Venice lagoon.

Luigi Brugnaro, who owns an employment agency, topped the bidding with €513,000 (£417,000) for the 99-year lease despite a rival offer from local community group, the Poveglia Association. The group hopes to convince the government to refuse his winning bid, branding it a "surreal" offer.

Brugnaro's spokesman Alvise Sperandio said the businessman had not yet decided what to do with the island but that he would ensure its "public use" and invest €20m to restore derelict buildings.

"He wanted to do it for Venetians to stop the Arabs or the Chinese from buying it for themselves," he said, adding that the businessman would meet Venice's mayor and consult the community on what to do.

The 7.5-hectare (18.6 acre) island near the Venice Lido was a quarantine point for ships coming to Venice in the 18th and 19th centuries and also served as a defence post for Venice with an octagonal fort. It was turned into an asylum in the 20th century.

Legend has it that the overgrown island, which is also where Venice's plague victims were kept, is haunted by the tortured souls of those who were buried there.

The island has been abandoned since the 1960s and has several dilapidated buildings including a church, a hospital, an asylum, and a prison plus housing and office buildings.

Lorenzo Pesola, with the Poveglia Association: "We will insist that the offer is turned down."

The state agency handling the auction has 30 days to accept or turn down the highest offer.