Northumbria University has turned down a £150,000 payment from the funding council, describing it as an attempt to "buy off" the institution's threatened legal action over the £185 million Higher Education Innovation Fund.
The university was offered the cash by the Higher Education Funding Council for England to help sustain its business and innovation activities after the council rejected its bid for £2.25 million in HEIF funding earlier this summer.
Tony Dickson, Northumbria's deputy vice-chancellor, confirmed this week that the university was taking advice on the possibility of a judicial review of the entire HEIF process.
Professor Dickson said: "Hefce has tried to buy off dissent by offering 'transitional funding' to institutions that did not get a core funding allocation.
"Northumbria, offered the princely sum of £150,000 over two years, has declined to accept an allocation - leaving us free to challenge the whole process and to plough our own third-leg furrow without having to account to Hefce for its targets and outcomes."
The Times Higher reported last month that the £185 million of grants made under the second HEIF funding round this year could be in jeopardy as vice-chancellors whose universities missed out on the awards planned a legal challenge.
The heads of at least six institutions that received no core funding said the HEIF allocations were "perverse". They argued that the HEIF competition denied funds to new universities, which were supposed to be the main beneficiaries.
Mainstream research funding, from Hefce and the research councils, is overwhelmingly concentrated in leading research universities. Of the 35 rejected HEIF bids, 20 were from higher education colleges, eight from new universities and seven from old universities.
The heads also said that institutions with clear and proven records in the so-called "Third Leg" activities, exactly the sort of work HEIF was set up to support, were overlooked.
Professor Dickson pointed out that Northumbria received nothing through the HEIF even though it dominates the activities of Knowledge House, a collaborative knowledge transfer network of all five Northeast universities - delivering more than 40 per cent of the support activities for small and medium-sized enterprises.
Meanwhile, Durham and Newcastle universities, already well funded through the research assessment exercise, won £2 million each through the HEIF.
There is also concern that despite a strong emphasis on allowing regional development agencies to help set the agenda, there is great variation between the success of different regions. Universities in the Northwest had a success rate of 30 per cent compared with 60 per cent nationally.
Hefce, which is understood to favour allocating future HEIF funding to all universities through a formula instead of running a competition, said this week that it would not comment on Northumbria's action and referred The Times Higher to its earlier statement on the HEIF process. This said:
"Understandably, proposers feel less happy when the results of a competitive bidding process are unwelcome. We are very confident that the process, involving four separate streams of assessors and the Advisory Board... was robust and transparent."
Hefce said that the assessment and decision-making process had been devised after full consultation and there had been "a greatly increased input from regional perspectives", with RDAs forming one of the four assessment streams and being represented on the Advisory Board.