More than 200 voluntary organisations in the capital are facing funding cuts totalling up to £16.5m over two years.
London Councils, which represents the capital’s 33 councils, yesterday agreed to return money from its London borough grants scheme to individual councils.
Borough council leaders will be free to spend the repatriated money as they choose.
In a statement, the London Voluntary Service Council and the Voluntary Sector Forum described the cuts as "disproportionate" and called for repatriated funds to be ring-fenced for voluntary sector projects.
So far only Sutton and Lewisham councils have agreed to this.
Sam Mauger, the chair of the Voluntary Sector Forum, said the impact of the cuts would be "great pain, no gain".
Peter Lewis, the chief executive of LVSC, said: "Leaders should not be retaining funds to fill potholes in their own boroughs."
The decision, recommended by London Councils’ grants committee last month, was rubber-stamped by its leaders committee despite protests outside the meeting by voluntary organisations.
Jules Pipe, the mayor of Hackney and chair of the leaders committee, was handed a petition on behalf of the Women’s Resource Centre opposing the cuts.
Frontline services supporting children and young people, the homeless and people at risk of crime will be among those losing out.
The £26.4m grants scheme will fall in value to £17.6m in 2011/12 and will decline to £9.9m the following year if no new funding is found.
Pipe said the "managed transition" of funding would allow affected groups "more time to establish which services they should continue to fund and give them flexibility to decide what will work best in their own local areas".