Malcolm Green, the council's chief executive, said there was no option but "a thorough review of everything" after it emerged the current savings package would not reach its 8 per cent target.
The policy committee on Monday vetoed the recent proposals by the Convention of Scottish Local Authorities Consultancy and will re-examine all primaries and secondaries for more cuts in a bid to save Pounds 5 million over three years. Significant cuts in the Pounds 26 million education budget are expected for the first time in 25 years.
The Cosla report, written by David Alexander, former depute director of education in Strathclyde, was commissioned after earlier disagreements over closing schools and the rejection of education department proposals. Mr Alexander recommended the closure of Sandwick, Scalloway and Skerries secondary departments and Uyeasound, Haroldswick and Quarff primaries.
Haroldswick, Britain's most northerly school, is to shut its doors with the consent of parents but the other closures were deleted after opposition from local councillors.
Mr Alexander also suggested the closure of a school hostel in Lerwick, reduced staffing at the town's Anderson High and a review of travelling teachers who provide music, art and gym classes in rural schools.
Jim Halcrow, director of education, complained that his department had been left to rewrite Mr Alexander's report after councillors blocked the only items offering real potential for savings - school closures.
Mr Green warned that "if the council does not honestly and positively review education, and is seen to do so, then the rest of the service areas will be justified in adopting the same attitude." The full council will debate the spending crisis next week.
Mr Alexander last autumn investigated Shetland's 37 schools and concluded the council was running an education system based on 1897 transport geography. Most small rural schools had stayed open with Victorian-sized catchment areas.
The recent battle to save the nine-pupil Quarff school, five miles from Lerwick, showed the strength of local feeling. Lobbies of the council have repeatedly prevented closures, most notably in Uyeasound. The two-teacher primary on Unst, Scotland's most northerly island, has twice beaten closure in the past two years.
The education department will now reinstate a closures plan. One scenario being canvassed after the rejection of Mr Alexander's main recommendations is to close as many as eight country primaries and concentrate pupils in 4-14 schools, catering for nursery, primary and secondary pupils.
Uyeasound will face a renewed closure call since pupils could be bussed to Baltasound Junior High, five miles away. On the mainland, Dunrossness and Cunningsburgh primaries are at risk. Scalloway Junior High could absorb four near-by primaries to become a "super primary" and it could lose its secondary pupils to Lerwick.
Two other Independent councils have run into trouble over closures. The Western Isles education committee refused to axe three primaries in Lewis and Harris, and Argyll and Bute education committee has left the full council on May 8 to decide on the future of two primaries on Islay and one in Oban.