Medical schools are fighting plans to transfer their funding to the Department of Health from the Higher Education Funding Council for England, The THES learnt this week.
Health secretary Alan Milburn and education secretary Charles Clarke met last week to consider long-term implications of the white paper, among them a possible shift to the DoH.
A DoH spokesperson said: "We are in the very early stages of looking at all the options for the funding of medical schools." He said there were, as yet, no preferred options.
Higher education minister Margaret Hodge will meet representatives from Universities UK next week to discuss the options.
Many medical school heads fear a move to the DoH could result in educational priorities being overshadowed by service or patient needs.
At a meeting of the Council of Heads of Medical Schools last week, deans discussed a counter proposal to set up a new funding body, independent of both departments. Many argue that such a body would allow schools to better meet the requirements of the National Health Service Plan.
Sir Graeme Catto, president of the General Medical Council and dean of the UK's largest medical school, Guy's, King's and St Thomas', said the most likely outcome of the review of funding arrangements was that responsibility would switch from the Department for Education and Skills to the DoH.
He outlined two concerns: "The first relates to the decline in standards that may follow when the monopoly employer is also responsible for the educational provision. The second relates to the importance of the linked research base; bio-medical research is not only important for future improvements in patient care but for the UK economy."
He said a new funding body would "bring together the complex funding streams and allow greater focus on the relevant teaching and on the research aspects of the health subjects."
Medical schools argue that their funding has been seriously eroded in recent years, partly because of the "unintended consequences" of decisions that ignore the relationship between them and the NHS.
One medical school head said: "We may now have unviable medical schools as a result of cuts brought in with little regard for the impact on those trying to deliver the NHS Plan."
Sir Graeme said that while the DFES, through Hefce, had responsibility for medical schools, the DoH contributed to the funding of clinical teaching through the service increment for teaching allocated to NHS trusts and had a role in defining undergraduate medical education. Nursing and other health professions are funded by the DoH.
Michael Powell, the executive secretary of the CHMS, said: "This is an extremely complex area, and it is important that there is a thorough and well-informed discussion."
Paul Turner, executive officer of the Council of Deans of Nursing, said:
"In the longer term, greater cohesion between the different funding streams from the DoH and the DFES for different professions would be desirable."
Medical schools have lost out in research funding over the past few years.
The underfunding of departments rated 4 in the 2001 research assessment exercise could cost them up to £14.6 million and comes on top of changes to generic research funding and cuts in the cost weighting of clinical subjects.
They also face cuts in teaching funds. Mr Powell said: "Medical schools take students with high A levels and are losing out on widening participation money."
The service increment money is being merged with funding streams for other health professionals - and medical schools may face yet another cut.
* The British Medical Association has warned that attempts to implement the rejected consultant's contract locally will have a "serious impact on the recruitment and retention" of medical academics.
Colin Smith, chair of the BMA's medical academic staff committee, said:
"The academic workforce appears to have been forgotten in the government's attempt to roll out ill-advised plans for consultants."