Welsh universities were facing an uncertain future this week as grant allocations barely rose above the rate of inflation.
The Higher Education Funding Council for Wales announced allocations totalling £335 million for 2006-07 - just 2.84 per cent higher than the previous year.
There are fears that even after receiving a £33.5 million cash injection this year to compensate for not introducing top-up fees until 2007, Welsh institutions will struggle to cover extra staff costs including pay modernisation and any pay deal struck with academic trade unions this year.
Welsh institutions will also have to contribute to a national means-tested bursary scheme due to be introduced in Wales from next year.
Robert Pearce, vice-chancellor of Lampeter University, which received a grant increase of just 0.33 per cent above inflation, said: "It is welcome that the Welsh Assembly has recognised there is a funding gap between institutions in Wales and England and Scotland, but it is disappointing that this year's grant settlement will lead to the gap increasing rather than diminishing.
"We are moving into very uncertain times as it is not yet clear which institutions will be affected the most by the changes we are facing."
Phil Gummett, chief executive of the HEFCW, said this year's disappointing settlement followed a relatively generous one for Wales last year.
"It is going to be difficult for the next couple of years to know how institutions' finances are going to settle down," he said.
Institutions had already received an extra £2 million in their grant for 2006-07 and £3 million for capital projects, he added.
Welsh institutions will also be able to bid for a share of £12.6 million set aside to support mergers and collaborations, plus nearly £2 million earmarked for encouraging widening access.
The funding council has added another £1 million to its fund for work between higher education and industry, boosting it by 24 per cent.
Widening access premium payments have also been increased by more than 52 per cent, research funding has been protected to help prepare institutions for the forthcoming research assessment exercise, and money provided to support institutions' growing pension costs.
But the funding council said the price for all of these increases was a 0.4 per cent cut in teaching funds.