Advantage West Midlands is set to cut off funding for businesses and public bodies which have already been promised grants, as it struggles to cope with funding cuts.
The Government agency, which distributes around £200 million a year, is re-examining 600 projects which have already been promised financial support.
Officials have concluded that in some cases, it will be cheaper to pay compensation for breaking contracts than to honour agreements.
It follows the Government’s decision to cut funding for the agency by £37.1 million, as part of a £270 million cut in support for development agencies across the country.
Projects it has backed in the past include a £7 million scheme helping West Midlands firms develop new projects in partnership with QinetiQ, a high-technology defence company with a base in Malvern, Worcestershire.
It provided £2.7 million towards a new business park in Bilston, one of the poorest parts of the Black Country.
And it provided £2.5 million to help West Midlands firms, working with Oxford and Cambridge Universities and Rolls Royce, develop an environmentally-friendly engine.
Ministers have also begun the process of dismantling the agency entirely - by writing to local councils urging them to draw up plans for replacement bodies.
Business Secretary Vince Cable and Local Government Secretary Eric Pickles have asked authorities to create local enterprise partnerships “to create the right environment for business and growth in their areas, by tackling issues such as planning and housing, local transport and infrastructure priorities, employment and enterprise and the transition to the low carbon economy.”
The change is part of the coalition government’s efforts to return power to local councils and reverse Labour’s creation of a series of regional quangos, which are gradually being abolished.
Councils will instead be encouraged to work together across “functional economic areas”. In practice, this could mean Birmingham, Solihull and the Black Country councils creating an enterprise partnership, although other authorities could also be invited to join.
Vince Cable, the Business Secretary said: “We are determined to rebalance the economy towards the private sector, so it’s important we create a more effective structure to drive economic growth and development across the country.
“We want a structure that reflects the genuine interests and commitment of enterprise, local councils and other stakeholders like universities and colleges. Local enterprise partnerships will provide that vision and then take on the task of renewing local economies and tackling local barriers to growth.”
Nick Clegg, the Liberal Democrat leader and Deputy Prime Minister, has also launched a £1 billion Regional Growth Fund, to help areas such as the West Midlands where a high proportion of jobs are in the public sector.
Ministers fear these regions could be hit hard by spending cuts, which will cut the number of public sector workers and could lead to rising unemployment.
But the fund, which operates in 2011/2012 and 2012/2013 and comes to £500 million a year, will replace national funding of £1.5 billion a year for regional development agencies.
The Department for Business, Innovation and Skills said that local enterprise partnerships will also have access to other sources of funding, but no details have yet been announced.
MPs are set to summon Dr Cable to explain how much support will be available for industry, and where they should go for aid.
Adrian Bailey (Lab West Bromwich West), the new chairman of the Business Select Committee, said: “We are intending as a committee to have Vince Cable come in front of us as soon as possible.
“It is a total muddle at the moment. Those companies that have existing funding streams appear to be safe, but those that are trying to make plans for the future don’t know who to talk to.”