Taxpayers could end up paying much more than the £2.9bn ($4.7bn) originally estimated by the Ministry of Defence for the next generation of aircraft carrier.
The Financial Times has said the final cost of two state-of-the-art carriers being built by BAE Systems could reach £4bn.
A Ministry of Defence spokesman admitted the final cost of the project could be higher than originally thought.
But he said it would not be known for certain until spring 2004, when the designs had been finalised.
"We are in the middle of an assessment phase," he told BBC News Online.
He also played down the FT's claim that the carriers would have to be simplified and shrunk to meet budget restrictions.
"The various options don't necessarily mean a smaller aircraft carrier."
Lead contractor BAE Systems hit back at the FT's claim that it could not build the two ships to the original budget.
"We have never given a firm price," said a BAE spokesman.
"There have been lots of figures flying around, but they are only rough estimates."
BAE has been stung by criticism in the past for cost overruns on defence projects.
Earlier this year, the government was forced to pay £700m to bail BAE out after cost overruns on the Nimrod maritime patrol aircraft.
The UK defence giant was awarded the lead role on the carrier project after a battle with French contractor Thales.
The two companies have since formed a 300-strong project team to assess the requirements of the Royal Navy and put a final cost on the proposal.
At the time, analysts warned the government's decision to select the larger Thales design in preference to BAE's could cause complications.
According to the Financial Times, quoting an MoD source, the Royal Navy may have to accept a smaller design if it wants to stay within the initial budget estimates.
Originally the plan was for the warships to carry 48 aircraft, the FT said, yet smaller ships could carry only 20.
The paper added that the MoD is concerned that a reduction in the size of the aircraft carriers would limit their effectiveness and ability to "project power".
It said the decision could also affect Britain's commitment to the F-35 Joint Strike Fighter, a linked programme with the US, which are planned to be carried on the carriers.
Prime Minister Tony Blair is this week expected to push for greater UK access to US military secrets, potentially clearing the way for a merger between BAE and a US defence giant.