The private company A4e has been chosen by the council's contracts committee to provide a community legal advice centre.
The contract, which unifies council and Legal Service Commission funding in the area for the first time, replaces the council's previous funding arrangement with the bureau.
The decision means the bureau will lose annual funding worth about £650,000, forcing it to reduce dramatically its 55-strong workforce and leaving its future in the balance (Third Sector, 16 April).
Lesley Thornley, chief executive of Hull CAB, said there was a "fifty-fifty chance" that the bureau would be forced to close.
The position was unclear because it was uncertain how many of the bureau's staff could transfer to A4e under Tupe regulations, Thornley said. The new contract is expected to start by August.
A group of Labour councillors in the Liberal Democrat-controlled council has also challenged the decision and hopes to get it overturned. The charity is running and online petition to gather support.
Well-placed local sources said that the challenge was unlikely to succeed.