Funding for the economic and social activities of Welsh universities, including links with businesses, is to be cut in real terms this year despite concerns that the "third mission" budget is already too low.
The Higher Education Funding Council for Wales intends to freeze the money it allocates for third-mission work - such as universities' involvement in knowledge exploitation and services to their local community - at £3.1 million a year.
Welsh vice-chancellors and university finance heads have complained that this amounts to an inflation-rate cut at a time when the Welsh Assembly and the Lambert review have placed third-mission activities among higher education's top priorities.
In a circular, the funding council says it is "well aware of concerns within the sector that the funding of third-mission activities in Wales (and economic development activities in particular) is insufficient".
But it adds that it is "not in a position to make further monies available".
The circular also acknowledges that the level of third-mission funding recommended by the Lambert review, of £150 million a year in England, would equate to about £9 million in Wales.
The cuts accompany the funding council's plans to replace its Higher Education Economic Development Fund with a permanent stream of third-mission funding that would cover a broader range of activities.
A spokesman for Higher Education Wales, the body that represents Welsh vice-chancellors, said: "We welcome the recognition that third-mission activity covers more than just economic development, but we are disappointed that Welsh higher education institutions are expected to under-take a wider range of activities without any increase in funding."
Some vice-chancellors have pointed out that this could mean spreading less money more thinly across the sector.
Richard Davies, vice-chancellor of Swansea University, said: "There is a concern here that the funding council is raising unrealistic expectations of what can be achieved with such small sums of money."
Huw Williams, finance director at the University of Glamorgan, said:
"Whereas the Welsh Assembly is writing large that this is what universities are all about, it is hard to see these priorities in this new funding mechanism."
Richard Carter, head of economic development for the funding council, said the funding available for third-mission work included the Welsh Knowledge Exploitation Fund, which allocated £4.9 million to universities last year.
He said: "We are looking to develop a kind of dual-support system. If we put these funds together, we should be able to achieve a significant output."