Mid-year forecasts from colleges to the Further Education Funding Council suggest that 58 colleges - one-in-eight - are technically insolvent and would have to declare bankruptcy if operating under the Company Acts.

There was also a 50 per cent rise this year in the number of colleges predicting that they would have an operating deficit by the end of August. Details of the financial health of the sector are due to be published by the FEFC today.

Michael Austin, chairman of the Association for Colleges, confirmed that rumours were rife within the sector. “But this appears to be the first time there is hard evidence and I am surprised at the extent of the problems. ”

Bryan Davies, Labour’s further and higher education spokesman, said: “The Government’s bluff on FE as been called earlier than expected.”

He added: “Unless the Government accuses management in two-thirds of our colleges of maladministration, the only conclusion we can draw is that the Government has forced the crisis on colleges.”

Don Foster, Liberal Democrat education spokesman, said: “It is a crisis that is inevitable when you choose to run colleges by a market-driven approach. ”

Labour and the Lib Dems were united in condemning the lack of a democratically-accountable regional structure for FE. Mr Foster said: “The reality of the cash crisis is reflected in the way colleges are offering all manner of incentives and bribes to recruit.”

The prospect of bankruptcy has sent shockwaves through the colleges.

Mr Austin said: “The spectre of the recent collapse of South Thames Training and Enterprise Council still looms over us.

“It indicates that ministers will let its failures die quietly in the corner.”

The TEC went bankrupt earlier this year, leaving four colleges with crippling debts of more than Pounds 3.5 million which the Government refused to pay.