Guidance published by the Further Education Funding Council urges colleges to draw up financial plans on the basis that funds for FE could shrink to levels never previously envisaged.
Principals contacted by The TES outlined a bleak picture of job losses and increasing cuts if the worst of the predictions came true.
John Bolton, principal of Blackburn College, said: "We have taken every possible efficiency step here and have no room left to manoeuvre. You begin to wonder what it will take for the Government to realise the damage being done to this sector."
Stockport College would have to rewrite its financial forecast completely in the light of the guidance, said principal Dick Evans. "We have not done our sums yet, but other colleges are talking of six and seven-figure cuts - we're talking telephone numbers."
A threat that the cash for work delivered above colleges' targets - the demand-led element worth Pounds 20 million last year - may be axed within two years. Principals see it as one of the most damaging.
Colin Flint, of Solihull College, said: "The removal of the DLE would end growth and the nation's chances of hitting training targets will be zero. It will mean further redundancies because there will be nowhere else to save money."
David Croll, principal of Derby College, Wilmorton, said the "draconian" move would block his college's chances of recapturing potential growth lost in its troubled first years after incorporation.
The FEFC has advised colleges to anticipate crushing blows from the Treasury and then devise forecasts for 1996-99.
It confirms that the value of additional funding units - the growth money colleges bid for annually - is likely to decrease for the first time from Pounds 16.40 in 1996-97 to Pounds 12.50 in the following two years.
The guidance says colleges are no longer likely to be given 5 per cent leeway on hitting their growth targets - they will have to meet them in full or exceed them. Principals agreed that the move would seriously hamper planning, leaving no flexibility for classes which are even slightly under-subscribed.
The FEFC also asks for a separate set of predictions based on a nightmare scenario of cuts, including the withdrawal of the DLE. The cash, currently an open cheque, could well be a target for Government public spending cuts.
The ever-cautious funding council believes colleges should have seen the clamp-down coming, but many are certain to have to revise their financial forecasts in the wake of the new guidance.
It is understood that 40 per cent of colleges are no longer regarded as "financially robust" by the FEFC. The council is preparing to take a more interventionist approach where it detects poor management steering a college into troubled waters.
Some principals insisted they had anticipated the squeeze. Helena Stockford, of Mid-Warwickshire College, said: "It might not please us, but anyone who believed there would be a halt to the progression downwards is living in cloud-cuckoo land."
Gill Anslow, principal of Guildford College, said colleges should stop whingeing and fight back.