The cash is more than half the Pounds 64.5m grants awarded by the commission this week. It will be used to upgrade the technology and buildings of 11 colleges and research centres, paving the way for the long-awaited University of the Highlands and Islands early next century.

The full cost of the UHI project is expected to be Pounds 86m and a condition of the commission’s grant is that there is matched funding from other sources.

Robin Lingard, project director, tried to reassure critics from traditional universities they would not lose money from this new competitor. He had the Scottish Secretary Michael Forsyth’s guarantee that it would come from the further education budget.

But leaders of the 43 FE colleges insist their budgets must not be hit. They already face a 12 per cent cut over three years and will receive capital grants of just Pounds 7.8m in capital grants this year.

Highlands and Islands Enterprise, the Government’s development agency which is the project’s major backer along with the local authorities, says the balance of funding will come from “a variety of public and private sector sources”.

Mr Forsyth attacked critics who refused to recognise “a good news story” and said that “the universities were there to serve the people: it is not for the system to decide what the people should receive”.

He decided to press ahead with the project in April against what he admitted this week was the “scepticism” of his civil servants.

Dubbed “the virtual university” the UHI will serve an area larger than Belgium, using computers and telecommunications to cover the most scattered campus in Europe.

The Association of Scottish Colleges, which represents all FE interests, is torn between concern at the funding implications for the majority and the enthusiasm of five northern colleges at the heart of the project.

Tom Kelly, ASC chief officer, said: “The main issue is one of recurrent funding. The Millennium Commission may fund buildings and facilities but the real cost will be in the teaching. So we would be looking for a reassurance that this will be new money and not come out of reduced funding from the rest of the system.”

Campaigners for the UHI say that, education apart, it will create more than 800 jobs and inject Pounds 70 million a year into the Highland economy. Lord Dalkeith, Millennium Commissioner for Scotland, said this wider benefit had helped clinch the case. Funds will provide capital for IT systems, libraries and building projects such as student residences.

Highland FE colleges already offer degree courses, validated by universities, in rural development and heritage studies. The FE colleges in the UHI network are Lews Castle, Perth, Shetland, Orkney, Thurso, Inverness and Moray in Elgin. Research centres are the North Atlantic Fisheries College in Shetland, the Sabhal Mor Ostaig Gaelic college in Skye, the Sea Fish Industry Authority facility at Ardtoe in Lochaber, and the Scottish Association for Marine Science at Dunstaffnage in Argyll.