Prime minister Tony Blair is behind a plan to create an elite tier of research universities in the biggest shake-up of higher education in a decade.
The government's plan would lead to the differentiation of a sector that has been nominally uniform since the polytechnics became universities in 1992.
Mr Blair has already dispatched a team to Oxford University. It is understood from senior university sources that the team discussed the possibility of channelling cash to top research institutions outside existing formulae. Downing Street has refused to comment on the discussions.
Similar consultations by the Department for Education and Skills will be under way soon as part of its strategic review of higher education, announced three weeks ago by education secretary Estelle Morris. All parts of the sector will be consulted.
Both Mr Blair and Ms Morris are convinced of the need to diversify the sector, with universities encouraged to concentrate on what they do best. Thought is being given to a range of financial incentives to encourage diversification, so-called mission-based funding.
Officially, the government has made no decisions as to the number of institutions in any one group or how additional money for world-class research and development would be channelled to elite institutions.
The pressures on research are great. Higher-quality research, demonstrated by the increase in the number of 5 and 5*-rated departments in the forthcoming research assessment exercise results, means the cash for research could be spread more thinly than ever.
The Higher Education Funding Council for England is worried by the situation and may delay implementing the RAE results for a year in the hope of getting more money. In the longer term, the funding council would rather see research funding restricted only to those departments rated 4, 5 and 5* than see a separate tier created. Removing funding for 3a and 3b would further concentrate research cash: at present, the top five institutions take one-third of the total.
At the other end of the spectrum, there is growing pressure on universities to recruit more students from low-income and other disadvantaged backgrounds. Mr Blair's 50 per cent higher education participation target will be reached only if people from these backgrounds are recruited.
Ms Morris wants to change the undergraduate class structure permanently to reflect those excluded due largely to their socio-economic circumstances. This accords with the prime minister's desire to end the waste of talent this involves.
But time is not on Ms Morris's side. She must hit Mr Blair's 2010 deadline for the 50 per cent target. The review of student support, which was announced unexpectedly in the summer by Mr Blair and is separate from the strategic review, reflects anxiety that the target may be missed.
The student review, the results of which are due to be announced in the new year, is expected to remove perceived or actual financial barriers to higher education such as upfront tuition fees. But students will still have to make a contribution to their education, probably after graduation.
The DFES is leading the review with input from the Treasury. A working group of officials from the DFES and the Treasury, chaired by Ms Morris, is reviewing the options.
A working group of officials has also been set up to carry out the strategic review of higher education. For the past three weeks they have been unpicking the issues raised by Ms Morris in her agenda-setting speech to vice-chancellors at London Guildhall University.
Officials from the Department of Trade and Industry, the Office of Science and Technology and the Treasury have an input. Soon they will begin consulting in earnest.
Financial incentives to encourage universities to concentrate on recruiting and retaining students from poorer backgrounds are being considered as part of the strategic review.
At present, universities receive a cash premium of 5 per cent for recruiting students from the poorest postcode areas. Institutions say postcode premiums are a crude way of supporting widening participation and that the level of premium is insufficient.
Additional reporting by Tony Tysome and Alison Goddard