They are desperate to find a long-term solution to difficulties posed by the current funding formula which allocates cash and spending power to councils.

Both David Blunkett, the Education Secretary, and Hilary Armstrong, the local government minister, believe the present system of standard spending assessment is unfair and want to change two key elements:

* the area cost adjustment, which compensates for higher wage bills and other costs in some regions

* the additional educational needs index, which takes account of the proportion of children with lone parents, families on income support and the ethnic diversity of children in the area.

The education SSA is split into five blocks - primary, secondary, post-16, under five and “other”, which includes additional educational needs and accounts for a substantial part of local government spending.

During the past year, civil servants and local authorities have been working on changing the system but John Prescott, the Deputy Prime Minister, admitted last week: “Sometimes the search for an improvement is unsuccessful.”

London had argued that up to Pounds 200 million could have been wiped off education budgets in the capital by any changes. The capital’s boroughs currently have higher additional educational needs assessments because of the above-average number of children with lone parents, families on income support and ethnic diversity.

In Hammersmith and Fulham, west London, for instance, pupils speak a total of 118 languages.

Not proceeding with the changes has taken the heat off for a while and Chris Waterman, education officer with the Association of London Authorities, said: “We are pleased but not triumphant.”

Mr Prescott said: “We need to look at the case for more radical reform, to produce something which is clearer and more robust.”