The cut will mean that the CRE will have to reduce its budget by almost pounds 1m, cutting deeply into front-line initiatives to tackle racism.
News of the decision could not come at a more embarrassing time for ministers. Last week, Prime Minister Tony Blair delivered two key speeches designed to emphasise his government's firm commitment to racial equality.
At a community meeting in Southwark, south London, Mr Blair said: "The single most important thing we can do is to make an absolutely clear statement on behalf of the Government ... that we believe in, and actually welcome a multi-racial and multi-cultural society: that it's a good thing; that it's not something to be frightened of."
Last night, however, the CRE Chairman, Sir Herman Ouseley, told the Independent on Sunday that a wide range of vital work would be hit, including help to people wanting to take industrial tribunals for racial harassment and prejudice in the workplace.
Sir Herman said: "Because of the cuts to our grant in recent years, we are effectively trying to police race relations on a shoestring. This latest cut will force the CRE into just covering its core activities."
The Government confirmed last week that the CRE's grant will be reduced from pounds 14.68m to pounds 14.38m in 1998/1999. Although this is only a reduction of pounds 300,000, the CRE plans to make pounds 990,000-worth of cuts to its budget because it has to anticipate the effect of inflation and wage rises. Its constitution prevents it from going into deficit.
The Government has also warned the CRE that its grant is projected to be cut next year to pounds 14.08m. In 1995/1996, the CRE's grant, under the Tories, reached a peak of just over pounds 16m.
Oona King, the black MP for Bethnal Green and Bow, east London, said she was unhappy with the Government's decision. "There has never been a greater need to reassert the multicultural argument and to put forward the case of the country's ethnic minorities," she said.
"This is what the CRE does, and any reduction in its budget can only have a detrimental effect on black people in Britain."
Sir Herman said the CRE, which was set up to promote racial equality under the 1976 Race Relations Act, will have to reduce its staff from 210 to about 180. He also revealed that the CRE will have to cut, or stop, grants it gives to seven independent bodies around the country involved with industrial tribunals, cut back on the help it gives to anti-racist campaigns, such as Kick Racism out of Football, and reduce follow-up work with medium- and small-sized companies guilty of discrimination.
Mike O'Brien, the minister responsible for community and race, defended the cut to the CRE's grant. He said: "It has been envisaged for some time that the CRE's budget would be reduced this year and the CRE was informed of this in late 1996. The cut has been implemented as previously planned because of the severe pressure on public expenditure overall. The Government also remains fully committed to the CRE's work and looks forward to working closely with it over the coming months."
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