Welsh universities are facing a cut in recurrent funding of more than 3 per cent next year.
In a letter to universities, the Higher Education Funding Council for Wales confirms that recurrent grant funding for 2010-11 will be reduced by 3.25 per cent in order to "release funds" totalling £4 million to support the Welsh Assembly Government's priorities for higher education.
Half of this ring-fenced pot will be sunk into research and half into widening participation.
Universities will receive their grant letter next month, but in its letter, HEFCW warns: "We cannot rule out the possibility of having to revise these planning assumptions before, or during, the academic year 2010-11 and strongly encourage institutions to make prudent assumptions in their own planning."
In December 2009, the Welsh Assembly announced its priorities for higher education.
Research-intensive universities, including Cardiff University, feared that the focus on links with business and widening access could mean they would be hardest hit.
But the Welsh Assembly has also committed to ensuring that Wales develops a "knowledge economy", with world-leading research playing a critical role.
In a document circulated in the sector, Developing a Regional Dimension to the Planning and Delivery of Higher Education, the funding council tells universities they must come together to prepare regional strategies for all areas of their work except research.
The strategies must be submitted to the funding council by November 2010.
Meanwhile, Leighton Andrews, the new Education Minister for Wales, has commissioned PricewaterhouseCoopers to carry out a review of the efficiency of the Welsh education sector.
He said his aim was to ensure that more public money was spent on "front-line" education, including teaching and learning.
"We must review the real cost of administering education across Wales. It is imperative that we reduce the bureaucracy and streamline the education system to make it lean and effective to benefit our learners," Mr Andrews said.
PwC will complete the first part of its research by the end of March.