The charity estimates the DoH's refusal to pay for the second year of a two-year contract to provide the telephone helpline service Saneline has cost it £750,000. Sane has asked for a meeting with health secretary John Reid to discuss how the Government can make amends. But it says it will seek legal redress if not satisfied.
The charity was under contract to the department to deliver Saneline between 2003 and 2005. But funding was withheld in 2004. The £1m was eventually paid last month, but only after the story was taken up by Radio 4's Today programme.
Chief executive Marjorie Wallace said the missing £1m meant auditors could not sign off the charity's accounts. This meant it was disqualified from fundraising from the national lottery and trusts and foundations.
She claims this cost the charity at least £750,000.
Sane has already announced the closure of two call centres for Saneline and says the whole service will close without new funding. The helpline receives 12,000 calls a week, but staff can respond to only a tenth of them.
The DoH was unavailable for comment.