Not sure about Streisand being cast before FUNNY GIRL's release, but having been a movie-crazy thirteen year old when DOLLY came out, I remember Streisand's casting was a huge controversy at the time. Everyone thought she was too young and that Channing (who had earned an Oscar nomination just two years earlier) should have gotten the part. But Streisand was huge news at the time and without a doubt one of the few--if only, by then--women who were bankable.
Julie Andrews had been scarred by STAR!, Doris Day had been blamed for the failure of JUMBO (and indeed her film career was on the wane due to bad choices), Shirley MacLaine was working on SWEET CHARITY (age-appropriate for her but a big flop on release), Elizabeth Taylor was not a musical star, Ginger Rogers wasn't even on a movie-goers' radar, Natalie Wood was still a star but obviously not right (and barely older than Streisand), Shirley Jones was too young and pursuing serious roles, Debbie Reynolds (who might have been good) was losing her audience. Singing aside, Lucy might have pulled it off based on how big a success YOURS, MINE AND OURS was, but at a time when tons of young stars were coming up, it makes sense that the studio went with Streisand.
Also remember that 20th Century Fox paid a record sum for the rights to Dolly! and had both succeeded and failed with big-budget musicals in the recent past. While they correctly identified Streisand as a potential box-office champ (and cast Walter Matthau, who was a huge star at the time), IMHO virtually every other decision they made was wrong. There couldn't have been less charm or chemistry between Marianne McAndrew (whose feature career was very short-lived) and Michael Crawford (who I still find hard to watch) and the whole move felt labored and wheezing, even to a 13-year-old.
The movie performed well at the time of its release but not well enough to make its money back, so it was considered a flop (and the critical reaction did not help its reputation).
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