The threat follows warnings from inspectors that the 26 pupils at a Bedfordshire residential school for children with emotional and behavioural difficulties are at risk of mental, physical and educational harm.
Inspectors first identified St Margaret's in Carlton as failing just two months after it opted out of local authority control. Follow-up visits showed no improvement.
The Funding Agency for Schools, the quango which handles opted-out finances, now wants to shut the school at the end of the year. A final decision rests with the Secretary of State.
According to the FAS, the inspectors' condemnation of St Margaret's is the strongest available to them. The school, which takes in pupils aged 11 to 16, was initially declared failing by the Office for Standards in Education in March 1996.
A second visit by inspectors a year later discovered that the quality of teaching was still very poor, that pupil behaviour had worsened, with continuing high levels of exclusions, and that the boys were at risk.
Governors then decided to consult on closure but were unable to reach a decision. The FAS undertook its own consultation on closure and, in the meantime, HMI visited the school for a third time in July.
The inspectors stated that the school was still failing to provide an acceptable quality of education for its pupils while documentary evidence indicated pupils remained at risk. The FAS agreed at the end of July to take immediate steps to close the school in the best interests of the pupils.
Responsibility for providing an alternative education for them rests with the school's three "feeder" local authorities - Bedfordshire, Luton and Milton Keynes. There are two other schools in Bedfordshire for children with emotional and behavioural difficulties.
St Margaret's is one of just nine GM schools to have been deemed by inspectors to be in need of special measures. None of the others has closed down. It is also one of 58 special schools on OFSTED's list of 331 failing schools. Six - three of them independent - have so far been closed.
Nobody was available at the school this week to comment.