Charities are threatening legal action against a primary care trust after it asked 18 voluntary organisations to return grants worth £150,000 that it had already awarded to them.
NHS North Yorkshire and York has given the organisations a month's notice to return the remainder of their 2010/11 grants in order to relieve "serious financial pressures".
The PCT claimed its service-level agreements with the organisations were not legally binding. It took the decision without consultation, in breach of two local Compacts of which the PCT is a signatory.
Angela Harrison, the chief executive of York Council for Voluntary Service, and Kate Tayler, the chief executive of North Yorkshire Forum for Voluntary Organisations, are coordinating attempts by the charities to retain the funding.
After talks with the PCT broke down last week, they have asked the Compact Advocacy Programme, run by the National Council for Voluntary Organisations, to intervene.
Harrison, whose organisation might have to give back £17,500, said: "We feel we have a binding agreement - even if there are legal loopholes, it was signed in good faith. This will have a huge impact on voluntary groups."
Tayler said she would "take urgent advice on the legal implications".
Letters demanding money be paid back within a month were sent on 19 October - the day before the comprehensive spending review.
Some charities are preparing to close offices and shed staff. "We're devastated," said Tom Doyle, chief executive of the sexual health charity Yorkshire MESMAC, which has been told to return £30,000 of its £120,000 grant. It expects to lay off four staff.
"It feels as though the voluntary sector is being penalised for the primary care trust's financial mismanagement. I don't see the PCT giving its staff one month's notice like we are having to," said Doyle.
A spokeswoman for NCVO's Compact advocacy programme said it had advised the charities to establish how and why the decision was made before considering further action.
She added: "I suspect the PCT would not treat the private sector this way. Generally speaking, the voluntary sector does not sue its funders, but it's not a mature professional relationship if you treat people this way."
The PCT had overspent its annual budget by a total of £17.9m by the end of September.
Sue Metcalfe, deputy chief executive of the PCT, said she recognised the decision would cause concern, but the organisation had overspent on its voluntary sector budget this year.
"We do recognise that as a partner organisation we have signed up to the Compact agreement," she said.
"However, as we look to protect our NHS services, no area can be immune to scrutiny.
"The reduction is mainly from infrastructure organisations and not from individual schemes providing direct support to the public."