Hundreds of prison educators were set to spend Christmas not knowing who their employer would be in the new year.
The Manchester College, England's largest prison educator, gave notice that it would terminate its prison contracts in the North East and South East over concerns about their financial viability.
Then, just days later, the college suspended its notice and resumed talks with the Learning and Skills Council.
Staff were told that the college would terminate the contracts unless a "pragmatic solution" could be worked out with the funding body. Prison educators' jobs would be transferred to a new employer taking over the contract if an agreement could not be reached.
A spokeswoman for the college said it was performing well but that the prison education contracts were "financially challenging".
She said: "The college is currently in high-level productive meetings with the LSC and both parties are committed to reaching a pragmatic solution by the end of December.
"We want to remain the quality lead in offender learning and continue to build upon established excellent partnership working across the regions."
Staff were angry about the uncertainty, coming so soon after the college announced a pay freeze for its prison teachers. One said: "When they took on the contract in August, I understand it was a fixed price. But now they are saying they didn't realise what was involved.
"It's a really bad atmosphere; there is a lot of ill-feeling and bad vibes. I understand it's like that across the prisons. I think Manchester has bitten off more than it can chew.
"I thought there was going to be an announcement that we were being made redundant, but they said our jobs are safe. But it could mean we will have three employers within a year."
Pat Jones, director of the Prisoners' Education Trust, said there was more money than ever before in prison education with a budget of #163;124 million this year, but providers were also expected to do much more. Almost half of the LSC's budget for offender learning goes to The Manchester College.
She said: "It's not that funding has been reduced; in recent years the Government has increased it. But the scale of unmet need for education among prisoners and taking their needs seriously requires more resources than the Government has been able to find."
Problems with funding threaten to overshadow what has been a period of improvement for prison education, with Ofsted noting in its annual report a higher proportion of provision rated satisfactory or better, and one prison judged outstanding for the first time.
An LSC spokeswoman said: "We have been notified that The Manchester College has suspended its recent notice of termination. We are pleased to be able to resume discussions with the college about the issues it has raised.
"Our chief concern is to ensure that the needs of learners are met. Discussions with the college are ongoing and it would be unhelpful and inappropriate to comment any further in public at this stage."