The council may have to make massive spending cuts to cope with the debt.
The problems began in 1980 when the council became trustee of the site and, through a charitable trust, took over the running of the palace and the 200-acre park from the Greater London Council. The palace - birthplace of BBC Television - was devastated by fire in the same year and the rebuilding and running costs paid by the council since have spiralled to pounds 54m.
The Treasury Solicitor, responsible for apportioning the deficit, has told the council the only money that can be guaranteed to be recovered is pounds 4.7m plus interest. Haringey can only recover more money from the trust if it proves it has managed its affairs prudently.
But in a critical eight-page letter to Haringey's chief executive, Gurbux Singh, the Treasury Solicitor accuses Haringey of:
failing to provide evidence to prove expenditure was properly incurred;
taking a risk by proceeding with the restoration of the palace after the 1980 fire;
depriving the board, responsible for the running of the palace, of its decision-making functions.
One councillor said last night: "This spells financial meltdown for the council. It has been going on for so long we should accept the debt in order to work out how best to deal with it."
Haringey was due to choose a developer for the 123-year-old "Ally Pally" next Friday, in an attempt to clear some of the debt and make the site at Muswell Hill commercially viable. When the trust begins to make money Haringey would be entitled to reclaim some of its expenditure.
Losses on the exhibition and banqueting business have added to overspending on restoration. The trust has run massively over budget on council money.
Haringey has maintained that the revenue debt of about pounds 24m from the running costs of the palace and park was the responsibility of the trust. However, the Treasury Solicitor says Haringey is entitled to an indemnity in respect of the revenue deficit only from 1991, amounting to pounds 4.7m.
Haringey comes under heaviest criticism on the capital debt from rebuilding the palace. In 1991, a report by Project Management International discovered that development costs exceeded the rebuilding budget approved by the council and accused Haringey of unauthorised expenditure on the refurbishment.
The Treasury Solicitor's letter says the "sheer size of the overspend, coupled with the criticisms in the PMI report, create a strong prima facie case that the expenditure was not reasonably and properly incurred. The council has so far done nothing to dispel that inference".
Both Mr Singh and Toby Harris, leader of the council, were unavailable for comment.