Middlesex University, where about 40 per cent of non-European Union students come from India, said it expected a 50 per cent year-on-year decline in students from the country for the 2011-12 academic year, costing it millions in lost fees.
The decision by the government to close the existing post-study work route that gives students an opportunity to stay on in the UK after graduation is being blamed.
Theresa May, the home secretary, announced in March that from April 2012 overseas graduates would be able to stay on only if they have secured a graduate-level job with a sponsoring employer.
Some details of the new scheme have yet to be ironed out. The uncertainty is leading more Indian students - for whom the ability to work post-graduation is a crucial factor - to opt for study in other English-speaking countries instead.
Meanwhile, it is also thought that press reporting in India of the rises in tuition fees for UK students may be leading to a misconception that fees for overseas students will be increased by the same level.
Terry Butland, deputy vice-chancellor (international) at Middlesex, told a seminar held by the Westminster Education Forum in London on 26 July that "something has to be done" about the damage to overseas recruitment.
He said the 50 per cent hit to Middlesex's Indian student recruitment, which he said could cost the institution £5 million, was being driven by the belief that the post-study route was completely closed.
Indian students often rely on borrowed money and need to be able to demonstrate to lenders that they can work after graduating to pay off their debt.
Gavin Jones, head of immigration at law firm Blake Lapthorn, which represents students and universities on visa matters, said: "Anecdotally we are hearing that there are fewer applications to UK universities from overseas students because of the uncertainty. Students from outside the EU pay very high fees and they are not going to do that if they cannot be sure they can move into employment."
He added that the government risked huge damage to education exports, and warned that sector forecasts of a 25 per cent real-terms growth in overseas fee income by 2013-14 now seems optimistic.
The government's own impact assessment predicts a £3.6 billion hit to exports from student visa changes.
Christina Yan Zhang, international officer at the National Union of Students, said the post-study work changes and "unnecessarily tight regulations" on dependants was leading to "a perfect storm in a crucial part of UK higher education".