The Paul Sartori Foundation may be forced to pay back £92,000 to the Welsh Assembly after proposals to build a hospice with Shalom House Trust collapsed after a planning mix-up.
The foundation claims it put forward a joint bid with the trust on the understanding that the grant would be used to convert a bungalow in St David's, Pembrokeshire, into a hospice.
The foundation agreed to provide both the staff and equipment, while the trust would carry out all the building work on the bungalow, which it owns.
The bid was successful and a grant was given of £350,000 over three years, of which the foundation has already spent £92,000.
In February, however, the foundation discovered that the trust had received planning perm-ission for a respite centre and not a hospice, as was originally thought. The building work has been halted and the foundation has pulled out.
Lorna Johns, hospice director at the foundation, said: "They should have put all their cards on the table. If we had known they only had planning permission for a respite centre, we would have thought twice about joining up with them."
Yet Arwel Davies, chairman of Shalom House Trust, denies it misled anyone: "We have been very clear from the start that we want to provide a combination of respite and palliative care."