A number of charities including Councils for Voluntary Service and Nacro hold New Deal contracts arranging work placements.
From April, funding will be cut by 40 per cent and the time young people can spend in placements with voluntary or environmental organisations as an option, will be halved from 26 to 13 weeks. The Government claims 58 per cent of voluntary sector placements go on to full-time jobs within 13 weeks.
The Department for Work and Pensions says the changes will also affect two other New Deal options, subsidised jobs and full-time education.
The focus will switch to improving employee skills instead.
All 20 of the CVSs that hold contracts with local Job Centres to place young people with charities under the New Deal, are expected to withdraw from the contracts because of the cuts. According to Kevin Curley, chief executive of umbrella body NACVS: "The general view is voluntary organisations are not likely to continue sponsoring this option and that somewhat less scrupulous private sector companies will fill the gap.
"These cuts make no sense at a time when we are left with the hardest-to-help young people. These are the ones who need more support to get them into work."
Curley added that many voluntary sector contract holders already subsidise the New Deal from their own voluntary income, so could not bear cuts to funding.
In Leeds, the entire voluntary sector option of the New Deal - 200 voluntary organisations - could be scrapped because the Job Centre will not seek another contractor if Voluntary Action Leeds withdraws. Richard Jackson, its partnership manager, told Third Sector: "Every CVS I have spoken to has either already given up the contracts or is intending to."
Ellen Cuerva, assistant director of education and employment with Nacro, which has contracts worth £3m, said: "We will scrutinise the situation very closely and it if becomes financially unviable or there is not a high enough level of learning, we will withdraw."
The department said the changes were being made to "introduce flexibility" to New Deal options. In exceptional circumstances young people would be able to stay in placement for up to 26 weeks.