The United States government has said that last week's decision by the University of California to abolish race-based admissions may cost the university - one of America's largest and most prestigious - its ability to qualify for government funds.

Speaking on television last weekend, White House Chief of Staff Leon Panetta called the decision "a terrible mistake". The Justice Department would review whether the change violated the terms of any federal grants or contracts that California received, he said. Funds for research could be affected, he added.

Under federal regulations, most universities and colleges which receive government money for students, administration and research must have affirmative action programmes in place. If they do not they lose the money. The University of California receives about $2.5 billion a year in federal funds.

Last week's vote by the University of California regents came after a tumultuous meeting at which California's governor Pete Wilson, a Republican, campaigned vigorously for the change as part of his bid to become US president.

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He was opposed by virtually every university chancellor in the California system, which has 162,000 students on nine campuses. But the signs are that the public likes his message.

Meanwhile some officials at the University of California have been studying the order that killed affirmative action last week. They say it is so loosely worded that it will not necessarily have much effect.

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By substituting socio-economic factors for considerations based on race or sex, they should be able to continue with the ethnic and gender mix that has made the university a model for others across the US, they say.

Under the new order, the university must choose between 50 and 75 per cent of its students strictly on merit (previously it had to select between 40 and 60 per cent on merit). Race is eliminated as a consideration. The change takes effect in 1997.

Governor Wilson hailed the change as "the beginning of the end of racial preferences" and the start of a new era of fairness in admissions. Black leader Jesse Jackson, who was protesting at the meeting, said it would deal a crushing blow to minority access.