The proposal by the Department of the Environment will come as a bombshell to charities and voluntary groups which thought their funding for people who sleep rough was secure for the next three years.
Unless the hostels can raise money from other sources, eight with almost 300 beds will close by March 1994, starting next month.
The hostels targeted include the St Mungo's Association shelter in City Road, the only place in London which accepts homeless people and their pet dogs. Also due to close are three hostels with 136 beds run by the English Churches Housing Group.
The Government had previously announced it was to spend pounds 86m on extending the Rough Sleeping Initiative over the next three years. This is a pounds 10m cut from the pounds 96m spent over the last three years.
Most of the cuts are being made by stopping funding to the shelters which are in the front line of providing roofs over heads. A consultation paper from the Department of the Environment yesterday said cash had been directed away from emergency hostels to permanent 'move-on' housing.
A spokesman said 2,200 permanent homes were being provided. About 1,000 were built and occupied and the rest would be filled as they were completed.
The housing charity Shelter, which runs a nightline to tell callers where there are hostel beds available, warned it would lead to a return of more people being forced to sleep on the streets.
Dominic Williamson, its nightline manager, said: 'Closing down direct access hostels before providing an alternative is a disastrous idea.
'Every night all these emergency hostels in central London are full and there are still hundreds, possibly over a thousand, still forced to sleep rough . . . Does the Government assume the demand will suddenly disappear?'
Mike Toward, regional manager of the St Mungo's Association, was shocked. 'The assumption with these closures is there is not a need for them any more,' he said. 'But what happens to the people who are already on the streets and those who find themselves homeless in the coming months?'