The Association of Learning Providers, which represents private trainers, is threatening to take the Learning and Skills Council to court for breach of contract.
It claims some of its members face bankruptcy because the LSC is refusing to pay the full nationally-agreed rates for apprenticeship training.
Lawyers for the association have written to the LSC saying they will seek damages for their members' losses unless the funding body reconsiders its position within 14 days.
The association said its board voted unanimously to issue the legal challenge to the contract put forward by the LSC for this year's apprenticeship intake.
It argues that the LSC's "unilateral decision" to fund apprentices already recruited at only 50 per cent of the agreed national rates is in breach of their contract.
The association believes that problems have arisen this year because the drop-out rate from last year's apprenticeship intake was much lower than anticipated, requiring the LSC to find more money than budgeted.
It estimated that this has left a pound;100 million shortfall, but the LSC has agreed to provide only pound;38m in additional funding for the extra apprenticeships.
ALP chief executive Graham Hoyle said: "We take this action very reluctantly. We consulted long with members, and indeed the LSC, before being forced to tread this path.
"We are, of course, grateful to the LSC and Department for Education and Skills' response in finding an additional pound;38m to go some way to alleviating this cash shortfall.
"It is clear, however, that providers are still being asked to fund the legitimate and agreed costs of apprentices to the extent that their financial position is being seriously compromised, with some facing bankruptcy.
"This cannot be the right answer for providers who have recruited apprentices in good faith and increased the quality of the programme, delivering the highest levels of success experienced in the 10 years since Modern Apprenticeships were introduced in 1994."
He said he understood "the very real financial difficulties the LSC has to work through". But he added: "The answer is not to expect providers to cough up the cash to pay for the delivery of high-priority apprenticeships after young people and their employers have been signed up."
Stephen Gardner, director of work-based learning at the LSC, said: "All providers have the money agreed in contracts they signed. The 50 per cent applies only to additional activity for existing learners and is being paid out even though providers may not have recruited the number of apprentices that were in their contracts."
Mr Gardner was due to address a seminar at the ALP's annual conference in Birmingham this week, at which the apprenticeship funding crisis was scheduled to become a major issue. David Way, the LSC's director of skills, was another speaker.
The ALP also issued a conference call for David Blunkett, the Work and Pensions Secretary, to put the direction and management of the JobCentre Plus (JCP) agency at the top of his in-tray.
It said there have been months of uncertainty over the introduction of Building on the New Deal (BoND), leaving many training organisations without JCP contracts and others unsure how to plan for the future.
The ALP said many employers will become "seriously disillusioned" with New Deal and the related Ambition programme as a result of the confusion unless matters are sorted quickly.
Graham Hoyle, ALP's chief executive, said: "A coherent and effective national skills strategy requires JobCentre Plus to have a clear strategy for the future."