Britain’s elite research universities were warned last night that they could forfeit millions of pounds in a shake-up of higher education.

David Eastwood, head of England’s university funding council, told The Times that, in future, universities that admit a large number of students from poor backgrounds were likely to receive as much public funding as those that concentrate on research. The shift will make it harder for middle-class students to get places at university.

At present almost a third (32 per cent) of all research funding goes to just five institutions: Oxford, Cambridge, Manchester, Imperial and University College London. These admit among the lowest number of students from poor backgrounds. They said last night that they feared they would have to fight harder for fewer funds and would struggle to compete with competitors, particularly in America.

The Higher Education Funding Council for England (Hefce) spends £6.7 billion on teaching and research in universities. Of this, £1.6 billion goes on research, £332 million on raising the number of working-class students attending university and £118 million on developing regional business links.

Professor Eastwood, its chief executive, said that as students pay higher fees and employers invest more in the sector, universities must play a greater role in society.

While insisting that research funding will not be cut, the former Vice-Chancellor of the University of East Anglia said that ensuring more young people attended university was as important as the take-up of subjects such as maths, engineering and physics.

"In some areas there is clearly a public interest in the ability of an institution to thrive in its locality and region because universitites are very often the key economic drivers and providers of civic and social capital," Professor Eastwood said. "You can imagine a position in the next decade, where some institutions because of their location ... have a significantly greater proportion of public funding than some other institutions which are thriving in a different part of the market."

While universities have concentrated traditionally on teaching and research, Professor Eastwood said it was now time for institutions to work out what they were good at and act upon it. It was not possible for all universities to excel in all areas, he said, and instead of competing with the large research-led universities for diminishing returns, they should capitalise on excellent teaching and regional economic growth.

However, Malcolm Grant, Provost of University College London and chairman of the Russell Group of leading universities, said that while all would like to see the funding gap in teaching costs close, that gap was worst for research universities that compete globally for staff.

“While we applaud widening participation, it would seem sensible for Hefce to look at ways to allow our world-class universities to compete at an international level and not to tax research funding to cross-subsidise widening participation across the sector,” Professor Grant said.

Five universities are already involved in pilot projects, including Sheffield Hallam, which has been given £1.2 million to undertake research on food waste, packaging and better ingredients with companies in the region.

Forty-two per cent of 18 to 30-year-olds attend university and the Government has set itself a target of 50 per cent reaching that level by 2010. Since the introduction of £3,000-a-year tuition fees, the numbers applying to university have dropped, especially among poorer school-leavers.

The University of Reading’s decision last night to close its world-class physics department, despite the prospect of a government rescue package, was met with dismay by the scientific community.

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