John Prescott's Department for the Environment, Transport and the Regions will this week confirm that "ethnicity" has been removed as a criterion for assessing grants to local authorities.
Labour MPs say the Government is abandoning poor ethnic minority communities. They have warned that the plan will lead to drastic cuts in services such as the provision of teachers for children for whom English is a second language.
They also say that council tax in those mainly poor areas will have to go up to compensate for the cuts.
Until now, local authorities have been given extra money based on the number of black and Asian people in their area. The grants, worth tens of thousands of pounds in some areas, have been part of the "children's social services" budget used to subsidise areas such as education and playgroups.
But ministers have decided that any extra money should be awarded on simpler measures of poverty. The move will lead to a substantial redistribution of money from inner-cities to rural areas.
London has been particularly badly hit. Brent, for example has lost pounds 7.5m - more than a quarter of its budget for children's social services.
Ken Livingstone, MP for Brent East, said the new scheme was a "nightmare" which discriminated against black and Asian people. "That can't be right for a Labour government," he said.
A spokesman for Mr Prescott's department said research had shown that other factors were better indicators of poverty than race.Reuse content