The Government will today pump £600m into improving front-line health services by taking unprecedented powers to direct how money is spent in the National Health Service.

Alan Milburn, the Secretary of State for Health, will announce that he is to use special legal powers, which no previous holder of his post has exercised, to order health authorities how to allocate their budgets. He wants to bypass NHS bureaucrats and let family doctors and community nurses decide the needs in their area.

Mr Milburn will also outline plans to reward health authorities that perform well with budget bonuses worth millions of pounds. Those that under-perform will see their freedom curtailed and will have their day-to-day activities supervised by inspectors, Department of Health officials or teams of managers brought in from successful health authorities.

The new system of centralised control will ensure that the £600m, the first of the £2bn being injected into the NHS from next month, is spent on:

More "intermediate care", such as new community hospitals, for people who are too ill to leave hospital but currently "block" beds;

Ending the "postcode lottery" under which drugs and treatment available vary according to where people live;

Cutting waiting times;

Reducing healthy authority deficits, estimated at £500m;

Giving GPs and community nurses a "cash cushion" to fund local projects.

The centrally decided priorities reflect the Government's determination to honour its 1997 general election pledge to cut waiting lists and to prevent another NHS crisis next winter. Some Labour MPs believe a repeat of the latest flu epidemic could severely damage the party and evenpersuade Tony Blair to delay the election planned for next spring until the autumn.

Mr Milburn said last night: "It is vital that the extra resources get passed through to front-line patient services as quickly as possible. Family doctors and community nurses are in the best position to assess patients' needs."

He was furious when £90m to help family doctors meet the costs of generic drugs did not reach many GPs but was retained by their authorities.

The new top-down system of finance reflects Mr Blair's impatience that the previous £21bn cash boost for the NHS has not "made a difference" in the eyes of the public.

The shake-up threatens to provoke a row with health authorities. Stephen Thornton, chief executive of the NHS Confederation, representing health authorities and trusts, said: "It doesn't seem to me to augur well for the partnership between the players that ministers have been talking about. We have no intention of spending this money on anything other than the Government's priorities."

He said that some health authorities had higher deficits than others and special powers might be needed to allocate funds disproportionately to help clear them. He added that managers were worried about when they would receive the rest of the extra £2bn. If it was not until July, when the national action plan was drawn up, the summer holidays would create further delay and it would be autumn before it could be spent, which might be too late to avoid problems next winter.