Playgroups have warned they face closure despite this week's pound;6.5 million Government grant to voluntary organisations.
They claim hundreds of groups could shut because schools are taking four-year-olds into their own reception and nursery groups.
Pre-School Learning Alliance figures out this week show that more than 1,200 playgroups have closed this year. A further 1,000 are predicted by the end of 1998.
Meanwhile, the National Campaign for Nursery Education warns that those entering primary school reception classes are being taught in overcrowded conditions by poorly-trained teachers.
Some 60,000 new nursery places have already been created to fulfill Labour's election pledge of providing a nursery place for every four-year-old. However, the PLA believes that most of these are in schools.
David Blunkett, the Education and Employment Secretary, said pre-schools would be among the beneficiaries of the pound;6m being given to local authorities for early years education. This cash would enable providers to stay open before and after the school day while children's parents were out.
He added that pound;500,000 would be made available to good pre-schools in danger of closing.
However, Mr Blunkett has come under fire from the Liberal Democrat education spokesman Don Foster, who claimed only pound;500,000 was actually extra cash.
He said the pound;6m had been announced "many months ago" and local authorities had already been bidding for it.
"Labour is not delivering the high-quality education that everybody knows is vitally important," he added.