Local authorities could in future be rewarded for poor exam results in their schools in a government move to focus money on poverty-striken areas.
The Department of the Environment, Transport and the Regions has been discussing proposals which would take exam results into account when extra funding for regional deprivation is calculated.
But the move would appear to run counter to the Department for Education and Employment's keenness to reward schools for achieving targets and getting good results from their pupils.
A DETR source said: "There are arguments in favour of using exam results. They are a good indicator of where more money is needed. There is a criticism that it would result in authorities with higher results getting less money and that being seen as a disincentive - but there are other incentives for helping children to get good results."
John Prescott, the deputy prime minister, announced a Pounds 1.1 billion increase in the money councils can spend on education as part of this year's local government settlement.
But David Blunkett, the Education Secretary, warned local authorities not to divert this cash into other projects - although councillors are technically free to spend it as they like.
Next year's standard spending assessment for education - the estimate of how much councils ought to spend - will be up 5.7 per cent before inflation, the Government announced this week.
This confirms the allocations outlined in the Government's comprehensive spending review earlier this year.
David Blunkett said: "This increase means that local councils will have more than Pounds 1.1bn extra provision next year, on top of the Pounds 5.4bn for schools capital we announced last month.
Meanwhile, fears of a major shift in local government funding, with London schools losing millions of pounds to the North, have been confounded.
Provisional figures released by the DFEE suggest the system for sharing Government money between education authorities has remained largely unchanged.
The London boroughs will have an extra Pounds 184.7 million to spend on education, with an average rise of between 5.7 (inner London) and 6 per cent (outer boroughs).
The other metropolitan boroughs do less well, with a 5.2 per cent increase, compared to 5.6 per cent for unitaries, and 6 per cent for the shires.
David Wilcox, the Local Government Association's deputy education chairman, said the overall education settlement was welcome, but highlighted pressures from other services - particularly social services - and teachers' pay.