Ministers have found a £3 million rescue package to prevent one of Britain's leading teacher-training providers from abandoning the subject and starving schools of more than 1,000 recruits a year.
The Institute of Education in London will be given an extra £1 million a year for three years, after ministers accepted that it could not afford to continue to train teachers.
Ministers are also planning special "London premium" funding, after other providers in the capital complained that it was no longer cost-effective to run the postgraduate certificate of education.
The THES reported in June that the IoE, which is celebrating its centenary, was planning to stop teacher training. The IoE said local schools were demanding an increasing share of the funds for mentoring and assessing students, and university salaries in London were too low to attract high-quality lecturers.
While other training providers were able to cross-subsidise teacher education, the IoE, as a specialist institution, could not.
The IoE confirmed that it spent £1 million more a year on primary and secondary initial teacher training than it received from the Teacher Training Agency. It trains more than 1,000 teachers each year and 95 per cent of them stay to teach in London.
A spokesman for the Department for Education and Skills said that the DFES would also review funding for the whole of the capital. "Although there have been significant increases in funding per trainee in the past two years, the DFES accepts that London providers face particular difficulty."
Geoff Whitty, director of the IoE, said: "I am delighted that we have found a way to maintain our involvement in initial teacher training, with real prospects of a long-term solution that will benefit the sector as a whole."
But the Universities Council for the Education of Teachers warned that the entire sector was in trouble. "If the government wishes to retain a quality teacher education system, it must be properly funded, not only in London but across the country."
The DFES said there would be a routine review of the national unit of resource, as there is every year.