Oh damn... Hole in the wall

Tahiti

Just been stripping some tiles off the wall in the bathroom and the usual messy job insued. However, we have a "Chimney" breast in the centre of the external bathroom wall which takes the boiler flue and some pipework up to the roof from the "boiler room" below.

It appears that said chimney breast was created from batten and the thinnest plaster board know to man. You can see where I'm going with this - just pulled a tile off the wall, and it took a great big chunk out of the wall and I can now clearly see inside the chimney breast (oops!). Obviously, I need to fix it, but want to do a better job than the previous person did.

Something else that has come to light after putting the hole in the wall (big enough to get my hand through...) is that there is no wall as such on the outside of the house for the length and depth of the chimney breast - there is simply a fascia board covering the 70cm wide gap!

I'm on a tight budget and any costs will be going on the dreaded credit card, but has anyone got any tips for insulating this at the same time? I've tried to illustrate the point below...
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[ A ....................... [ B.....................[ C.................... ]
[ ............................COLOR=White].....................[/COLOR] [ [COLOR=White] ........................[/COLOR
[............................ [ ...CHIMNEY .... [........................ ]
COLOR=White].............................[/COLOR][ ____________ ][COLOR=White].........................[/COLOR
[............................................................................ ]
[............................................................................ ]
[............................................................................ ]
[............................................................................ ]
[............................................................................ ]
[............................................................................ ]
[............................................................................ ]
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A and C are the room recesses around the chimney breast (coincidentally with windows on either side of the breast at 1.3M above the ground). B is the "chimney" itself.

The walls of A and C are of a breeze block construction (the bottom of our house is brick, and the top half is concrete blocks with tiles attached), and C has no wall - simply a UPVC facia board covering the cavity (not exactly energy efficient) for as far as my eye can see (definitely half a metre + deep by 70cm wide).

What would you do?

A) rip off the rest of the tiles, and assuming there's only another couple of holes, simply repair, skim and tile over.

rip out the cruddy chimney breast, build the wall up behind the facia, insulate as much as possible within the breast, and then create a new chimney (consider that the sink is attached to the existing chimney breast) in the same sort of materials (batten and plasterboard).

C) something else? Please make suggestions as I'm racking my brains what to say to my lovely (pregnant) wife before she returns to the house this afternoon and panics about the hole in the wall...

Thanks in advance.