The DFEE appears reluctant to allow the high-profile Oak Hill Christian School in Bradley Stoke, near Bristol, to "opt-in" from the private sector to the state GM system - a move that would cost the Government Pounds 6 million.
The Prime Minister has called for more schools to "opt in". But with the Department for Educationa and Employment acutely aware of financial constraints, the overall policy on expansion of the grant maintained sector remains unclear.
The 1993 Education Act allows private schools, or groups wanting to set up new schools, to gain state funding through GM status, known as opting in.
The Christian Oak Hill Trust, which already runs a small primary school and is trying to set up a secondary school, has now been told it must prove there is a "basic need" for places in the Avon area before it can get state money. This is despite the project being favoured by prominent Conservatives. The trust maintains that, until recently, ministers had considered demand from parents to be a sufficient reason for building new GM schools.
Ruth Deakin, former head of the Oak Hill primary and a trustee of the proposed new school, said: "When the rubber hits the road we find ourselves faced with more hoops to climb through and with having to prove basic need. The goal posts have changed, which is very demoralising."
The trust won the immediate support of prominent Conservative educationists such as Baroness Cox and Lord Skidelsky when it announced its plans two years ago, and the trust was influential in shaping Government legislation.
Throughout the debates on the 1993 Act, Ruth Deakin says, Conservative politicians were suggesting that parental demand and "denominational need" for new religious school places would be considered more important than the need to remove surplus places.
Ruth Deakin said: "John Patten said explicitly to me that parental demand is a very important factor. He left me with the clear impression that it could be considered as the main criterion. There's definitely a great deal of difference between the policy-makers and the people implementing the policy."
The trust already has written promises of support from 650 parents, accounting for more than 1,000 potential pupils. But until the past few months, Avon education authority has maintained that there are empty school places in the surrounding area, which would mean there is no need for a new school.
The DFEE said: "There is a range of considerations which will be taken into account in reaching a decision. Oak Hill school is aware of that."