Universities that recruit too many students face a cut in their government grant, ministers have warned.

After years of being encouraged to attract more students from working class backgrounds and to achieve a target of getting 50 per cent of young people into university by 2010, the Department for Innovation, Universities and Skills, has put a break on student expansion.

In his annual grant letter to the Higher Education Funding Council for England (HEFCE), Universities Secretary John Denham asked universities to “minimise and preferably eliminate over-recruitment” in 2009-10.

“Any over-recruitment in the coming year could result in a transfer of HEFCE grant back to this Department in that or future years, in order to meet the consequent unanticipated student support costs,” he said.

The move follows an admission by ministers last year that they had underestimated the cost of the number of people entitled to a full student maintenance grant by almost 10 per cent, leaving a £200m black hole in university finances.

In response, eligibility for student grants was restricted and the number of additional student places was reduced from 15,000 to 10,000 in 2009-10 to help to plug the funding gap.

Mr Denham confirmed the cuts, adding that funding for the coming year would be accordingly reduced by £19 million. He told universities, “at this stage you should not allocate any further additional student numbers for 2010-11”.

Mr Denham said that HEFCE’s grant for 2009-10 would be £7.8 billion, up from £7.07 billion in 2008-09, with a 3.2 per cent rise in funding for teaching and a 4.5 per cent increase for research. Nearly £200 million of capital funding will be brought forward from 2010-11 into 2009-10.

Mr Denham said he recognised that much of the money will go to “reward the highest levels of research excellence”, suggesting that institutions such as Oxford and Cambridge will benefit strongly in the allocation of research funding.

David Willetts, the shadow education secretary, said it would now be impossible for universities to meet the government’s target of getting 50 per cent of young people into university by 2010.

“These figures will come as a shock to sixth formers taking A-Levels and diplomas, to people who want to upskill during the recession and to employers needing higher skills. We cannot hope to emerge from the recession in a competitive state until there is a clearer strategy for higher-level skills,” he said.

Diana Warwick, Chief Executive of Universities UK, representing Vice Chancellors said that while the percentage increase for the upcoming year was welcome, she was concerned that this year’s funding letter does not look beyond 2009-10.

“What the sector needs is stable, sustainable funding to assist higher education institutions in their forward planning,” she said.

Wes Streeting, president of the National Union of Students, said it was essential that increased funding was made available in future years.

“The higher education sector needs an equitable and sustainable funding system that recognises huge demand and ensures that even more people have the opportunity to benefit from new skills,” he said.

Mr Denham’s letter also called on universities to use their resources to help businesses and the unemployed during the economic downturn.

“One of my main priorities for the Council in 2009 is to support and encourage the sector to use all of its huge capacity to train, research, innovate and inspire, reaching into local communities to offer practical help to individuals and businesses though these tougher economic times while laying the foundations for the future,” he said.

The letter added that the sector should look at promoting science, technology, engineering and maths as they are “the subjects that employers consistently tell us they will need in the long term”.

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