An intensive lobbying campaign was launched this week to save colleges from swingeing cuts.
College leaders and funding officials promised a fight to the end to stop ministers from overturning a commitment to provide funds for colleges that exceed their recruitment targets. And they warned of swingeing cuts, redundancies, course closures and possible bankruptcies if they fail.
The Department for Education and Employment has threatened to stop any payments for demand-led funding from this month, prompting the Further Education Funding Council to warn colleges to freeze all new commitments.
If they carry out their threat, FE colleges stand to lose anything up to Pounds 100 million a year. The Treasury called a halt after funding chiefs asked for Pounds 84m to pay for expansion over the past two years.
As The TES went to press, ministers were still undecided about the future of so-called demand-led funding, which is designed to pay for growth in successful colleges.
But the chief executive of the Association of Colleges, Roger Ward, vowed to fight the change - at least to secure funding for the rest of the academic year.
He said: "We are going to point out to the Government that they cannot expect FE colleges to meet targets and continue to grow if they break basic funding rules.
"We intend to organise a lobby and a meeting with ministers to say that growth cannot come off funding - that's not acceptable."
Senior AOC figures are also asking how the situation came to a head with a Pounds 84m demand on the Treasury.
FEFC officials say they were amazed at developments and insist the Government had full information about the cost of expansion.
They are angry that ministers have questioned a budget that funding chiefs had believed to be secure.
Labour has condemned the Government's action and tabled a series of Parliamentary questions to establish how the crisis developed. But a spokesman said the party could give no commitment to restore any cut, although FE would share in a proportion of a Labour government's windfall tax.
Principals warned that flagship franchise schemes involving the private sector could be destroyed.
David Croll, principal at Derby Tertiary College, Wilmorton, was in crisis talks with company managers amid fears that a collapse of expansion funding would destroy his pioneering training project.
The college has a deal to train hundreds of workers for a consortium of brewers across Britain, including Marston's.
Mr Croll said: "The damage to our relationship with employers will be really significant. We have done a lot of work building the bridges with employers and it will take us years to recover.
"This is not training that has existed before. It is innovative training and work with people without qualifications who are working towards hitting national targets."
FEFC officials stressed the problem was not confined to colleges with franchised courses.
Principals were furious that ministers were throwing funding rules into doubt in the middle of an academic year, and said college planning had been thrown into chaos.
David Gibson, principal of City College, Manchester, said: "For the first time the Government has been asked for significant funds and it has reneged on an agreement.
"This takes away leeway that we expect to have. If you go one unit under your target, you are cut, so you plan to be slightly over and expect the DFEE to compensate."
Peter Smith, general secretary of the Association of Teachers and Lecturers, said: "This is a political shambles. Colleges are being crucified for their success."