The Government's own advisory body on immigration has warned that Britain's economy could suffer permanent damage if the squeeze on highly skilled non-EU migrants entering Britain continues.
Consultations on fresh measures to cut permanent immigration to the UK are due to close on 9 September. These could restrict the right of migrants to settle and forbid them from staying beyond five years.
In April, the number of migrants from so-called highly skilled Tier 1 and Tier 2 was capped at 22,000.
But a report from the Government's Migration Advisory Council (MAC) says each time the number of people in these groups coming to the UK falls by 10,000 it will slice £560m from Britain's GDP at a time when the economy is struggling to recover.
The report, "Limits on Tier 1 and Tier 2 for 2011/2012 and Supporting Policies", said: "Tier 1 and 2 migration makes a small but positive contribution to GDP per head. Such effects will accumulate over time and become more significant." It also warns that cutbacks will not be evenly spread and may have a severe impact on certain sectors. The City of London has relied on a plentiful supply of skilled non-EU workers.
Ministers have already been warned of dire consequences if they fail to rethink the policy. The Japanese Embassy has told the MAC that Japanese companies could pull out of the UK while Royal Bank of Canada says a hard cap could "irrevocably damage Britain's reputation as an international business hub".
While concessions have been made on issues such as intra-company transfers, British business groups are also continuing to voice concern over the direction of Government policy.
Neil Carberry, employment affairs director at the CBI, said: "The ability to base highly skilled foreign staff in the UK helps to attract investment that also supports British jobs. With numbers in the employer-sponsored work permit system already relatively low, there is little evidence that this part of the system should be the government's key priority on controlling migration.
"We should want to attract these people to come and retaining a route to settlement is a key part of that, although businesses don't object to having a more formal points test for the right to settle."
Adam Marshall, director of policy at the British Chambers of Commerce, said: "Any Government moves to reduce net immigration must not harm the UK's competitiveness. "While we support the prioritisation of investors and those who have a clear job offer over those who don't, we must allow global talent into the UK.
"Evidence suggests that skilled migrants make a positive economic contribution to UK plc. Business has no problem with tighter eligibility criteria and enforcement of the rules, but closing the door on individuals with critical skills could seriously harm business growth at a time when the economic recovery should be the top priority."
Expat groups, particularly those from Commonwealth countries, have also criticised the plans, which could cut the number of workers coming from those countries by thousands.
Ministers have promised action on immigration, but have no power to limits the largest source of incomers to the UK: migrants from the EU.
A Government spokesman said that even with the current limit, applications for work visas for Tier 2 migrants were well below the level of the cap.
Damian Green, the Immigration minister, said: "For too long immigration has been out of control and this Government is committed to having a system which benefits the brightest and the best but curbs the number of people coming into the country who are detrimental to the economy."