Shadow education minister Bryan Davies spoke of "the worst case I have ever seen of mishand-ling of Government resources in relation to Government policy", and demanded a Commons debate.
Mrs Shephard raised the expansion budget in a letter dated January 10 to Ribble Valley Conservative MP Nigel Evans which explained the FE funding mechanism.
She said colleges received guaranteed funding, as well as cash based on meeting recruitment targets. And, she said, "even more funding is available, albeit at a still lower rate, to colleges which exceed their targets".
But two weeks after the letter was received, the Further Education Funding Council heard the expansion fund, worth an estimated Pounds 86 million this year, was threatened.
Ministers are understood to be considering a face-saving exercise which could secure college funding for the rest of the year. The letter came after The TES revealed in December that Treasury officials were looking at the expansion incentive scheme, and months after the FEFC identified its loss as a risk.
Principals have warned of mass redundancies and possible closures if so-called demand-led funding (DLE) is axed.
Ministers insisted no decisions had been taken, but principals said the Government had reneged on its commitment, threatening the places of thousands of students.
Mrs Shephard had faced embarrassment earlier on a visit to Soundwell College, Bristol, which stands to lose around Pounds 500,000 if the demand-led budget is cut.
She said: "The FE sector has been given an extra Pounds 80m for the next two years, but it is the case that it has expanded. It has been even more successful than our own forecasts, and the DLE has risen 12 per cent, compared with the projection of about 6 per cent."
But Roger Ward, chief executive of the Association of Colleges, said: "The campaign we have led has pointed firmly at Mrs Shephard's department and said 'We had a promise, that promise has been broken and you owe the sector Pounds 86 m'."
Leader, page 18, FE focus, page 25