Sir Michael Bichard, permanent secretary at the DFEE, said councils were under no obligation to fund either a boom in student numbers or to prop up dwindling sixth forms.
The pledge to maintain present funding levels- part of the post-16 reorganisation outlined in the White Paper Learning to Succeed and contained in a consultation paper on sixth-form funding - applies only to current pupil levels. However, it had been widely expected that the guarantee would be extended to schools that increased their sixth forms.
Sir Michael told the Society of Education Officers conference in London: "If numbers increase beyond the current level there is no guarantee that funding will increase. We are not saying that local authorities in this situation need to protect the per capita funding and if numbers reduce we are not saying that it would be right to protect funding."
This could spell trouble for the North-west, Merseyside, Yorkshire, outer London and the South-east where latest Government statistics show a drop in staying-on rates in schools and colleges at 16. Authorities where numbers have increased include Knowsley, Calderdale, Cambridgeshire and the London borough of Sutton.
The limits prompted David Cracknell, Cheshire's education director, to call the guarantee a "hollow safeguard" and provoked alarm among heads.
Lorraine Barker, head of the Mirfield Free Grammar and sixth form, in Kirklees said: "There will be outrage from schools if this guarantee does not materialise."
Mrs Barker said that, with students coming from further afield to study at Mirfield, the sixth form was set to grow from 180 this year to 200 in September, and possibly to 250 within two years.
"I do not expect the Government to provide anything above and beyond funding for the students that we bring in. But I do expect that if there are 200 in the sixth form, to have funding for those 200."
John Dunford, general secretary of the Secondary Heads Association, is now writing to Education Secretary David Blunkett.
He said: "We need to be much clearer about the meaning of this guarantee before schools can feel safe about their future funding."
Meanwhile, it emerged that top businessmen warned Tony Blair that industry would boycott his post-16 reforms if chief inspector of schools Chris Woodhead was given control of all inspections.
Sweeping powers were to be given to the chief inspector until Nick Reilly, boss of Vauxhall Motors, and Bob Reid, former British Rail chairman, protested. Business leaders were not confident that OFSTED under Mr Woodhead would carry out the depth and breadth of inspections required for industry. It is understood they objected strongly to his style. A boycott would have proved hugely embarrassing to the Prime Minister, who was intent on industry dominating the proposed pound;5 billion Learning and Skill Council.
As a result, Mr Woodhead will now only also inspect full-time courses for students aged 16 to 19. The Training Standards Council will continue to be responsible for post-19 inspection.
FE Focus, 29