The Arts Council has scrapped a grant of more than £200,000 to the Notting Hill Carnival's organisers after money paid towards last year's festival vanished.
The council has also refused to hand over some £60,000 it had pledged towards the 2002 events because of worries about accounting methods.
Less than three weeks before the start of the carnival, organisers insisted it would go ahead as planned, and reassured sponsors that their money would be accounted for.
But the Arts Council's move - which follows months of wrangling - leaves a cloud over Europe's biggest street party. The council will now bypass the organisers, paying the money directly to performing groups.
An Arts Council spokesman said: "It became absolutely clear that this organisation, which had been struggling for two years, was not in proper shape."
He said the money had been withdrawn because the carnival had failed to meet the basic conditions of a public grant . "As the guardians of taxpayers' money, we can't throw it at something where we won't know how it was spent," he added. The Greater London Authority has also signalled its dissatisfaction with the carnival's auditing procedures by refusing to hand over £50,000 for last year's event after the organisers failed to provide invoices. This year it is giving £120,000 towards private companies responsible for stewarding the event and a further £95,000 for a review of the carnival to prevent a repeat of its financial problems. Kensington and Chelsea Council is also contributing about £100,000.
Eighteen months ago, the chief executive of the carnival trust, Claire Holder, was ousted by a rebel group of trustees, who organised the 2002 event.
A spokesman for London Notting Hill Carnival Ltd pointed out that the Arts Council funding this year had increased by 30 per cent, but acknowledged the need for it to become self-sufficient.
Roddy Crozier Maharaj, a director of the company, stressed that "stringent accounting practices" have been introduced.Reuse content