Plans to part-fund universities via their commercial activities could have "grave consequences" for society, according to the elite Russell Group of institutions.
The Higher Education Funding Council for England is developing plans for a third stream of core funding for knowledge transfer and wealth creation to supplement those for teaching and research.
But a Russell Group report says that ministers and funding chiefs risk losing sight of what universities are for and forgetting their wider role in civil society.
The report, compiled by the Science and Technology Policy Research Unit at Sussex University, warns that such funding must not overlook universities'
ability to help improve the quality of life and the effectiveness of public services.
"There is much more to the relationship between universities and the rest of society than commercial activities," the report says.
Third-stream funding is already available to universities through the Department of Trade and Industry and Hefce via a number of schemes designed to support entrepreneurial activities.
Universities have been invited to compete for money under schemes such as the £82 million Higher Education Reach Out to Business and the Community fund and the £40 million University Challenge fund.
Ministers recently confirmed a £170 million extension to the £77 million Higher Education Innovation Fund, up to 2005-06. They have also made a firm commitment to establish a permanent third stream of funding.
Hefce is about to begin talks with the Office of Science and Technology about the distribution of such money and it is carrying out research into a potential funding formula.
But the Russell Group is concerned that such a formula will be dangerously narrow. Its report says: "The present approach overlooks the wide range of different ways in which universities interact with society.
"It is likely that narrow commercial indicators will be used to drive all third-stream funding allocations. By overemphasising this aspect to the detriment of others, this approach would have grave consequences for the UK university sector and the society they serve."
The report highlights the additional contributions universities can make through third-stream activity.
"Universities make contributions to government and civil society as well as the private sector, assisting not only with economic performance but also helping to improve quality of life and the effectiveness of public services.
"Any approach to university third-stream activities that focuses purely on university commercial activities is likely to miss large and important parts of the picture."
Christopher Padfield, director of Cambridge University's corporate liaison office and a member of the group that commissioned the report, said the debate went to the very heart of what universities are for. He said there was concern that the government's focus on the role of universities as economic drivers risked narrowing the research agenda with a focus on short-termism and immediate economic returns. This would damage universities' crucial role in testing received wisdom and carrying out blue-skies research.
"Our society seems to be struggling somewhat with the notion of the university. Government rhetoric certainly is much stronger in terms of universities' role in training and their role as an engine of the economy," he said.
"We are very happy for that to be part of our roleI yet we are concerned that this sort of rhetoric shouldn't take over the culture that we see as being so particularly valuable for the health of society in the long term."
Adrian Hill, head of third-stream funding at Hefce, said the council and government had yet to agree on the process for distributing money, but he said that it was certain that it would keep "both the social and wealth creating aspects in the frame".