A political row broke out after David Blunkett, the Secretary of State for Education, said he would "not sit by and watch public funds wasted on ineffective services" after a second damning report on Hackney's education service.
The east London borough's political leaders accepted Mr Blunkett's decision to send in consultants to prepare for contractors to take over school improvement services.
Labour and opposition MPs called the move undemocratic. Diane Abbott, the Labour MP for Hackney North and Stoke Newington, accused Ministers of "experimenting" with Hackney. Don Foster, the Liberal Democrat's education spokesman, said the move was "making the first step towards breaking the link in the democratic process between the electorate and its local representatives".
Local government leaders said they were taking legal advice. Graham Lane, education chairman of the Local Government Association, said: "This is a minefield. It affects the whole of local government."
Mr Blunkett's action is the first time the Government has used new powers to take over local authority services. He said he was "minded" to force Hackney to contract out its school improvement service and its language and learning service. Other authority functions, including financial management, personnel and information technology, may also be contracted out.
A report by the Office for Standards in Education said the borough had improved, but warned: "This is a local education authority which is still failing, well over a year after a highly critical inspection, to provide key elements of the help schools need ... improvement to date has been hard won and is neither sufficient nor sufficiently broadly based."
Consultants will now draw up specifications for private firms, not for profit organisations or local authorities to take over some council services. Ministers will put contracts out to tender. The Department for Education and Employment will choose a contractor.
Hackney Council called the Ofsted report "fair and balanced" and said it would work in partnership with the Government, adding: "We are willing to explore any avenue which will raise educational achievement in the borough."
Diane Abbott told the Commons: "It won't do for ministers to say they are doing this on behalf of Hackney parents and children when they have not come to Hackney, not consulted local people and certainly not consulted local MPs. "