The government will terminate the contract of the Charity Commission's controversial chairman Dame Suzi Leather, also known as the "quango queen" after her appointment to a string of public bodies, unless the Commission ends its "politically motivated" attack on private schools.
Ministers are infuriated by the Commission's "aggressive stance" towards independent schools as well as Dame Suzi's public criticism of the Coalition's cuts.
They have investigated her contract – which was renewed for three years in 2009 – and found it can be ended early. They have warned they will replace her in the £80,000 a year three-day a week post early unless she "backs off" on plans to force private schools to offer more bursaries.
Labour condemned the threat and said it was important for the Government to respect the "independence" of the Charity Commission.
The Tories have expressed increasing concern about what they say is the "political bias" of the Charity Commission under Dame Suzi. She has targeted much of the Commission's regulatory focus on independent schools, asking them to justify the "public benefit" of their valuable charity status.
Two small prep schools – one in Derbyshire, the other in Lancashire – failed the "public benefit" test in 2009 and were forced to raise the number of bursaries they offered.
The Tories believe the focus on bursaries is wrong and will drive up fees and lead to school closures.
They believe the Charity Commission should accept a wider definition of "public interest" including schools which open their facilities to the local community – or provide teaching support to local state schools.
The Independent Schools Council has been granted a judicial review hearing in May to challenge the Charity Commission's implementation of the rules. Dominic Grieve, the Attorney General, has also referred the Commission to the Charity Tribunal over the fairness of its rulings.
"We think she should be given some time to prove that she can work constructively with us," said a senior Government source. "But her appointment is in the gift of the Secretary of State. He can terminate it. We want to see a difference approach at the Charity Commission and an end to the politically motivated statements."
Dame Suzi, 54, who is a member of the Labour Party, has angered ministers by using her position as a platform to warn that the £5bn of spending reductions in the voluntary sector, attacking the Prime Minister's flagship Big Society programme as a cover for cuts.
She said: "If you cut the charities, you are cutting our ability to help each other, you are cutting what structures our neighbourliness. That is what the Big Society is all about, so you are pulling the rug from under that."
Dame Suzi has held numerous public sector posts since 1997 and has close links to the Labour party. She faced accusations of cronyism when she was appointed chairman of the Government's new Food Standards Agency in 2000. Two years later she was appointed to chair the Human Fertilisation and Embryology Authority. In the post she sparked fury by claiming children do not need fathers. She described doctors taking account of a child's need for a father before approving fertility treatment as "nonsense".
She also served on the board of United Kingdom Accreditation and was chair of the School Food Trust.
The right-wing think tank the Adam Smith Institute has accused her of pursuing a "political agenda" on behalf of politicians who lacked the "moral courage" to tackle the issue themselves.
A spokesperson for the Charity Commission said: "Although fee reductions are an obvious way of making the services of a high fee-charging charity, such as a school, accessible to people who cannot afford the fees, this is not the only means of achieving this.
"It is a common misconception that the Charity Commission only takes account of bursary support in our public benefit assessments of charitable independent schools. In fact, we look at all opportunities to benefit and have provided numerous examples of non-bursary provision in our guidance.
"We have always said that the majority of independent charitable schools will have no problem demonstrating the public benefit they provide."
Dame Suzi's CV
Married with three children
Education: Privately educated at St Mary's School, Calne, Wiltshire
Career highlights: 1997-2001, chair of Exeter and District NHS trust; 2000-02, first deputy chair of food Standards Agency; March 2002-2006, chair of Human Fertilisation and Embryology Authority; May 2005-6, chair of School Food Trust; 2006-present, Charity Commission chair
Fee Or Free? Where cabinet ministers were educated
David Cameron, Eton, £30,000 a year boarding (private)
George Osborne, St Paul's boys school, £18,000 a year day (private)
Nick Clegg, Westminster, £20,300 a year (private)
Theresa May, St Juliana's Convent for Girls, Begbroke (mixed)
William Hague, Wath-upon-Dearne Comprehensive (state)
Michael Gove, Robert Gordon's College, £9,700 a year day (private)
Vince Cable, Nunthorpe Grammar (state)
Andrew Lansley, Brentwood District (direct grant)
Danny Alexander, Lochaber (state)
Liam Fox, St Bride's High (state)
Ken Clarke, Nottingham High (direct grant)
Chris Huhne, Westminster, £20,300 a year day (private)
Jeremy Hunt, Charterhouse £29,800 a year boarding (private)
Philip Hammond, Shenfield (state)
Eric Pickles, Greenhead Grammar (state)
Caroline Spelman, Herts and Essex High for Girls (state)
Iain Duncan Smith, Conway Naval School (state)
Oliver Letwin: Eton, £30,000 a year boarding (private)
Baroness Warsi, Birkdale High (state)
George Young: Eton, £30,000 a year boarding (private)
Francis Maude Abingdon, £13,800 a year day (direct grant)
Dominic Grieve, Westminster, £20,300 a year day (private)