The Communities and Local Government department may remove councils' responsibility for voluntary sector funding or force them to change their policies if they cut the sector's funding disproportionately, according to new draft rules.
New guidance from the department, published for consultation today, says councils "should seek to avoid passing on disproportionate cuts" to the voluntary sector.
It also says councils that are planning to cut funding for voluntary sector groups should give three months' notice to the groups and their service users if the funding cut "will materially threaten the viability of the organisation or the service it provides".
The new rules will be introduced under the 'best value' duty set out in the Local Government Act 1999.
A spokeswoman for the CLG said councils that did not follow the guidance could be subject to judicial review or, in extreme cases, to the sanctions contained in section 15 of the 1999 act.
Section 15 says that if a council does not act in accordance with the 'best value' duty, the secretary of state can "direct the authority to take any action which he considers necessary or expedient to secure its compliance with the requirements".
It says the secretary of state can also exercise the council's functions directly, or appoint another person to do so, for a set period of time.
"Local authorities must comply with the duty of best value and they can be judicially reviewed if they don't," the CLG spokeswoman said. "And for those who fail in their duty, ministers have, as a last resort, powers to intervene."
She said the department defined "disproportionate cuts" as reductions in voluntary sector funding that were bigger than the reductions to councils' own budgets.
Central government departments would sign up to the same principles, she said.
The guidance also says that local authorities should consider social and environmental value when commissioning services and are required to consult local voluntary and community groups when deciding how to do this.
It says the government is intending to repeal the 'duty to involve', which came into effect in 2009 and requires local authorities to consult individuals, groups, businesses and organisations likely to be affected by their actions.
If a council cuts its funding for a service being delivered by a voluntary sector organisation, the guidance says, it should make it possible for voluntary groups and members of the local community to suggest ways of "reshaping" that service. It says councils should help by making available all the information these groups need in order to do so.
The department has opened a consultation on the guidance, which closes on 13 June.