Ministers held secret talks with council leaders and college funding chiefs last week to thrash out an agreement to stop schools and colleges waging enrolment wars.
Many schools and colleges have spent years scrapping over sixth-form students and the cash they bring with them. Colleges have criticised headteachers for banning their staff from schools, and refusing to hand out college literature. Some colleges have responded aggressively by offering cash or gifts such as mobile telephones to tempt teenagers to enrol.
The secret talks centre around creating a common funding system for school sixth forms and sixth-form and further education colleges to end long-standing rows over unequal budgets.
But the proposals also include handing planning powers to the Further Education Funding Council - the quango which administers college budgets.
Graham Lane, the Local Government Association education chairman who attended the talks, said the plans were "revolutionary".
He said: "It would mean that small sixth forms which are uncompetitive and uneconomic are driven out of business by the funding and planning mechanism. They would not continue to be subsidised.
"Students will also get proper career and course guidance and no longer have to rely on schools. We have heard of too many cases of students being enticed to the wrong course or the wrong institution."
Mr Lane said regional boards of the FEFC would get planning powers, with local authority representativ es working alongside. He said: "The planning boards will decide on funding and which courses are run."
But Joe Boone, assistant secretary of the National Association of Schoolmasters Union of Women Teachers, said the potential implications were "grave". He said: "The plans raise serious issues of parental choice and cast doubts over teachers' job security. There will be outrage.
"School sixth forms do not provide just an academic education but pastoral care and guidance to young people which will be lost if these proposals go ahead."
Education Minister Baroness Blackstone gave the first hints of the new move at a conference last week. She said she was looking at "ways in which we can end this absurd competition between schools and the FE sector. We are going to get a grip on this; we want a collaborative, sensibly-planned framework for 16 to 19-year-olds without competition allowed to run riot. We can see from the past decade that it does not work."
Local authorities have been keen to regain some influence over further education. A new regional planning structure for sixth forms and FE colleges would give councillors the stake they have wanted ever since colleges went independent in 1993.
But schools are sure to oppose any moves to close small sixth forms, which are popular with parents.
The FEFC is run by a board of principals and business leaders appointed directly by the Education Secretary. Regional committees are also unelected, although the FEFC has already agreed to involve councillors in decision-making.
Professor David Melville, FEFC chief executive, told MPs on the education select committee this week that 15 local authorities were preparing to pilot a college-style funding formula for school sixth forms - the first steps towards a common funding formula for all post-16 education, he said.
"I think there's a willingness to discuss that issue and we have to start to address that because we are no longer able to make sensible decisions in local areas," he said.