Ministers have been accused of using National Lottery cash to cover up for cuts in discretionary grants.
Virginia Bottomley, the Heritage Secretary, said last month that Lottery cash would be used to support drama and the arts. She promised to examine "the scope for encouraging talented youngsters to develop their artistic ability to the full".
Mrs Bottomley is currently in talks with Gillian Shephard, the Education and Employment Secretary, over how to spend the cash. But the Association for Metropolitan Authorities says the target group includes students currently denied discretionary awards of up to Pounds 7,000 a year because of cuts in Government spending.
Both the AMA and Association for Colleges insist this is a breach of the principle spelled out by John Major that Lottery money is for capital projects and "will not replace existing Government spending".
Drama schools have suffered more than most from cuts in grants. Courses are expensive and run largely by independent institutions. Some have been given degree status, to attract mandatory awards, but the rest depend on students funding themselves.
Few LEAs give discretionary awards for dance and drama, even to students on courses in public-sector colleges funded by the FEFC, said John Brennan, AFC policy director. "It illustrates the need for a thorough review."
Graham Lane, chairman of the AMA education committee, said: "All courses should be funded by central Government and administered, as is the case with degree courses, locally.