The draft National Lottery Bill, which will legally establish the Big Lottery Fund, authorises the Secretary of State for Culture, Media and Sport, to specify persons and purposes "to whom the fund may or may not make grants or loans".
The move represents further proliferation of the power the state has taken over lottery funding.
The current law merely permits the Government to tell lottery distributors the matters they "must take into account" in determining where lottery grants go.
Stephen Bubb, head of chief executive's body Acevo, condemned "the latest step in the creeping nationalisation of lottery good-cause money" and the "steady erosion of the lottery's independence".
Luke FitzHerbert, researcher with the Directory of Social Change, said: "This formalises what the more cynical among us have been expecting for some time - the Government taking for itself the power to decide which charities can and cannot get lottery grants."
The momentum for the creation of the Big Lottery Fund began with the Community Fund's ill-fated £340,000 grant to the National Coalition of Anti-Deportation Campaigns, which was condemned by Home Secretary David Blunkett.
A DCMS spokesman said the power already existed under the New Opportunities Fund and was intended to deal with potential conflicts of interest. "It is there to ensure that if the fund wanted to give a grant to an organisation that it had a specific interest in, financial or otherwise, Tessa Jowell could step in and stop that grant going ahead. It is essentially a backstop ... concerns about blacklisting are wide of the mark."
But former Community Fund board member Steven Burkeman warned that the Bill could damage the whole ethos of the Big Lottery Fund's grant making.
"The fund must feel free to make grants to unpopular groups without having the Secretary of State breathing down their necks," he said.
"Even if it is argued that this power will almost never be used, its presence in the bill could influence Big Lottery Fund staff. Having the Government looking over your shoulder is not a good way to make grants."