Britain's armed forces are under pressure because of restrictions on spending imposed by the Treasury, the Ministry of Defence has admitted.
HMS Trafalgar is part of the Royal Navy's submarine fleet under review
Sir Kevin Tebbit, the highest ranking civil servant in the MoD, gave the assessment in evidence to MPs.
It follows comments by the Royal Navy's most senior officer that up to a fifth of the fleet may be cut.
Admiral Sir Alan West, the First Sea Lord, said defence restructuring would mean losing naval jobs and ships.
Sir Kevin told the House of Commons defence committee that the MoD had been ordered to cut its cash spending over the past year, although its overall budget remained unchanged,
He said the Treasury orders had come against a background of increased costs, due to equipment procurement, and a successful recruitment drive which had pushed up the wage bill.
"That has put more pressure on the budget as it has happened faster than expected," said Sir Kevin.
He denied the MoD was facing a cash "crisis", but said Defence Secretary Geoff Hoon was negotiating with Chancellor Gordon Brown to secure greater flexibility for the MoD to manage its budget.
Earlier, Admiral West warned that proposals to adapt Britain's defence capabilities to modern conflict requirements could result in drastic cuts.
His warning follows the government's publication of a Defence White Paper last year.
In the paper, the Ministry of Defence said warships, tanks and aircraft would all be cut as the armed forces attempted a shift in emphasis to become more flexible and adaptable.
Admiral West told The Times the Navy could be considering cutting three Type 42 destroyers and several Type 23 frigates, saying there would be "a hit" on that section of the force.
He also acknowledged those fleet losses would lead to job cuts from the current 41,000 strength of the Royal Navy and Royal Marines.
And the Navy's 11 nuclear-powered submarines, which are expensive to run, would have to be "looked at".
"There are going to be some hard choices and ministers will have to review all the implications, including industrial ones," he told the Times.
Admiral West reiterated his comments in a speech to the Royal United Services Institute in Whitehall on Wednesday.
He accepted cuts in some areas would be necessary to allow the Navy to fund spending in others.
"Some of our older vessels contribute less well to the pattern of operations that we envisage and... reductions in their numbers will be necessary to allow spending where there is a greater requirement," he said.
Admiral West said he believed many future naval operations would be "joint and multinational", but the ongoing terrorist threat made it likely the Navy would remain at the front line of Britain's defence.
He did not have a "crystal ball", but believed the possibility for naval engagements would increase due to new threats to world peace and prosperity.
"I'm clearly thinking here of the terrorist threat to shipping, to offshore energy installations and the need to control drug trafficking and piracy," he said.