Scottish higher education principals have accused the Scottish Executive of reinstating the binary divide in its proposals to merge the further and higher education funding councils.
And Universities Scotland has warned that it will seek "substantial changes" to proposals in the 50-page consultation paper, which it claims could damage the effectiveness of the sector.
The proposals include reclassifying all institutions as specified tertiary education providers (Steps) within four different categories (see below).
Ian Johnston, principal of Glasgow Caledonian University, said: "We object strongly to the Step idea reintroducing the binary line. We simply can't believe ministers or officials mean that."
Principals are also alarmed by a clause giving ministers powers to designate "other providers" as Steps, which they fear could open the door to private companies.
They believe the draft merger legislation raises the spectre of central planning. The council, for example, would have a duty to take account of Scotland's future skills needs, while ministers would gain powers to tell institutions to investigate mergers.
Bill Stevely, convener of Universities Scotland, said: "Central planning must not be introduced, the higher education sector must not be split into a two-tier system and universities and colleges must not be forced to fight for the same limited resources."
The Association of University Teachers Scotland also condemns the "rebranding" of institutions, saying it does not accept that post-92 universities should be labelled second class.
But Jim Wallace, Scotland's lifelong learning minister, said: "The identity and legal status of our world-class universities and colleges will not change at all."
The consultation paper says the four Steps are a convenient means of administrative categorisation.
John Field, Stirling University's lifelong learning expert, said he saw nothing sinister in the plans. He welcomed the proposals for a unitary funding council, which, he said, would not in itself achieve coherence and progression but would promote "a more joined-up approach to lifelong learning".
Tom Kelly, chief officer of the Association of Scottish Colleges, said: "We are a bit more relaxed about it than the universities. But we would make the same point as they do about distinctiveness of mission. We don't want to see the funding council merger generating mission drift where everything gets focused on degrees as the one form of higher education, and higher education as the one form of lifelong learning."
Mr Kelly said he was encouraged by the "hint" in the paper of comparable funding for comparable provision. The colleges have argued that higher national certificates and diplomas should be equated with the first and second years of a degree respectively because they are at the same level on the Scottish Credit and Qualifications Framework.
The Scottish Executive is seeking responses by July 15.
* Student places and course choices at Scotland's 46 further education colleges will be restricted after next year's funding allocation, the Association of Scottish Colleges has warned.
The Scottish Further Education Funding Council has announced that the total income colleges earn from funded courses will rise by 3 per cent in 2004-05.
"This means that colleges will receive a real increase in their core funding to maintain existing levels of teaching provision and help them address increased costs," an SFEFC spokesperson said.
But Tom Kelly, chief executive of the ASC, said: "These allocations still mean a challenging year for colleges and their staff. There are increased cost pressures and strong demands from students."
The SFEFC found extra cash to cover increased contributions for academic pensions, Mr Kelly said, but pay increases or higher pension contributions for other staff would have to come out of the main recurrent grant, which rose by 4.7 per cent overall.
The ASC welcomed an 80 per cent increase in funding to improve buildings.
The £17 million in capital funding accounts for nearly half the increase in the SFEFC's budget, which will rise to £464 million in 2004-05.