The leaking of the letter was a severe embarrassment to the Government as it called into question its commitment to nursery schooling
In the memo Mrs Shephard appeared to suggest nursery education could be cut to finance statutory services and that expansion in this area could be halted and diverted into schools.
She defended the Government's funding of education and said local education authorities had enough money to meet this year's 2.7 per cent teachers' pay award.
MPs, who are under increasing pressure from parents, local councillors and school governors over threatened education cuts, are urged to hit back at critics by challenging LEAs' "credibility" over providing value for money.
Mrs Shephard suggests they ask: "To what extent are the LEAs expanding non-statutory services (eg under-fives) at the expense of statutory services?"
But the attempt to counter the growing discontent over threatened school budget cuts seems to have failed. As campaigners reacted angrily to an apparent threat to nursery education, the Government found itself again on the defensive.
Margaret Lally, chair of the National Campaign for Nursery Education, said LEA nursery plans were already being hit by spending restrictions.
"We have always doubted the Government's real commitment to increasing state nursery education. This just shows how little they have,'' she said.
David Blunkett, Labour's education spokesman, accused the Government of speaking with two voices on nursery education - "one for public consumption and the other privately to its own MPs."
A spokesman for the Department for Education said the letter had been misinterpreted and refuted suggestions that Mrs Shephard's comments were signalling that the Government intends to use the voluntary and private sectors to fulfil its commitment to universal nursery education, as right- wingers have urged.
The Government remained committed to John Major's pledge to provide nursery education to all four-year-olds.
"The bottom line is that new money is going to be made available to fund nursery education and the Government is not reneging.
"The Secretary of State has made it plain that this will be a mixture of state and private provision. This was a letter which stressed to colleagues that they should question local authorities' spending on non-statutory spending. Nursery education was just one example."
Yesterday the Association of Metropolitan Authorities urged Mrs Shephard to act immediately to head off the crisis over teachers' pay. With local authorities due to set their final budgets within days, the AMA's education committee called on the Government to fund the teachers' pay rise in full.
t Shropshire County Council yesterday voted to set a budget more than £6m above its Government capping limit, largely to protect spending on schools.
The move implies a council tax rise for county dwellers of about 13 per cent, whereas the capping limit implied a 2 per cent rise. By the summer the Government could seek Parliamentary approval to order Shropshire to cut its budget, in which case it would have to make rapid and severe cuts.
Oxfordshire County Council will meet on Monday to decide whether to set a budget above the capping limit.Reuse content