Sadler's Wells, shocked by the decision of the ROH, has issued a legal letter before action, a preliminary step to suing. Ian Albery, chief executive of Sadler's Wells, said the Royal Opera's decision could close the new pounds 42m theatre unless he receives immediate support to replace the 25 weeks of performances the ROH has axed.
The theatre demanded pounds 1m from the Arts Council to help it to find and book replacement companies, a "near mission impossible" at six months' notice rather than the normal two years'.
The theatre's board has told Mr Albery to take all legal action necessary, which might include a claim against the Department of Culture and the Arts Council for inducing the breach of contract.
The deadline for action was "days rather than weeks", Mr Albery said.
The ROH's cancellation of next summer's performances could cost Sadler's Wells vital matching funding for the rebuilding programme and place 100 staff jobs under threat. "This lack of thought and co-ordination puts in jeopardy Sadler's Wells as an institution," Mr Albery said, adding that the situation was a "debacle of major proportions".
The theatre was due to re-open in two weeks after two years of building work, funded by pounds 36m of lottery money.
The project was still more than pounds 4m short of the pounds 10m "matching funding" needed to release the full lottery grant.
Mr Albery said meeting the shortfall would be made more difficult by the uncertainty. Banks who had agreed bridging loans were questioning the financial consequences of the ROH cancellation, which would have a "catastrophic effect" on capital fund-raising.
The chief executive was particularly bitter as Sadler's Wells had not wanted 21 weeks of opera in a building that was supposed to be an international centre for dance. The theatre had agreed under pressure from the Arts Council.
Royal Ballet and Royal Opera performances scheduled for this autumn have not been cancelled, but are at risk of disruption because of industrial action by ROH staff.
The management at Covent Garden has set 26 October as the deadline for union agreement on new working practices and manning levels.
The building works at Sadler's Wells are running late and 500 men are now working night and day to enable the formal opening on 10 October and the first public performance three days later.
Sadler's Wells receives pounds 220,000 public subsidy. The Royal Ballet and Royal Opera are getting pounds 14.4m this year. The Covent Garden redevelopment plans won pounds 78.5m lottery money.
The Arts Council said yesterday that it could not yet comment on the Sadler's Wells request for pounds 1m.
A spokesman for the Department of Culturesaid the department did not believe that Sadler's Wells should suffer as a result of the ROH's difficulties. The Royal Opera has previously said it would honour its contract in full.
The Arts Council spent nearly pounds 23m on administering lottery awards in England last year, pounds 8m more than the previous year, according to its annual report. By far the largest proportion of the administrative costs for 1997-98 was the pounds 8.4m on fees to consultants recruited to assess applications.