Class sizes are set to rise sharply after one-third of colleges failed to get the cash they asked for from the Further Education Funding Council this year.
Many principals warned that Government attempts to iron out funding discrepancies will damage education as budgets were overstretched.
Ruth Silver, Lewisham College principal, said more students would be packed into classes as only 7 per cent more cash was given to fund an expected 12 per cent growth in student numbers.
She warned that colleges would end up televising lectures to packed halls of students once the little extra cash available for growth is phased out next year.
"I don't think the funding council understands the role of colleges in their communities. In Lewisham, where employment is so low, we have so much scope for expansion, yet we are not permitted to meet that need."
A similar squeeze on cash has been felt in the North-east. Joanna Tait, principal of Bishop Auckland College, Durham, said the funding formula - which tried to eliminate funding anomalies - was a "false efficiency".
Bishop Auckland won only 80 per cent of the growth cash it had hoped for. The college was scouring other sources, including European cash, to finance planned expansion. The college, in an area of high unemployment, had severe difficulty setting a balanced budget for this year, she said.
Only 69 per cent of colleges had their funding applications met in full. The largest increases went to colleges which met last year's growth targets and had low average levels of funding, according to the FEFC. One problem was that the Pounds 2.7 billion available was oversubscribed by Pounds 85 million.
Community work will suffer at Lambeth College which asked for 10 per cent but got 6. Adrian Perry, the principal, said: "The FEFC is reining in colleges that have successfully expanded."
* The Further Education Funding Council has rejected Labour party claims (see page 19) that 45 colleges are technically insolvent. It agreed with claims that some colleges were facing financial difficulties but insisted that "no college is insolvent".