Universities could be fined up to £500,000 if they fail to satisfy the requirements of the proposed new "access regulator".
The watchdog promises not to interfere with university admissions
The government has published its guidelines for setting up the Office for Fair Access (Offa).
This new watchdog will require universities to make efforts to attract more students from poorer backgrounds.
The government's guidelines say that "in extreme circumstances" Offa can impose this maximum fine.
The new access regulator - once dubbed "Oftoff" - can also require universities to provide bursaries of at least £300 to students from the poorest families.
This will apply to universities which charge the highest level of tuition fee, which would be £3,000 under legislation currently going through Parliament.
This financial support, intended to make sure that poorer students are not deterred from higher education, will be in addition to a £2,700 grant from the government.
The Education Secretary Charles Clarke, said that Offa's focus would be on those universities "with fewer students from poorer backgrounds". They will be expected to do more than provide the minimum of £300 bursaries.
The financial pressure that Offa can apply to universities is spelt out in the guidance from government.
"In extreme circumstances for blatant non-implementation of their own access agreement, Offa has the power to fine universities or refuse to renew their agreement - preventing them from charging above the standard fee."
This would mean that the extra cash from higher tuition fees, which universities say they badly need, could be cut off if the regulator feels a university is failing to keep to its agreements to attract a wider range of students.
But the guidelines emphasise that Offa will not have any direct involvement with admissions and will be as non-bureaucratic as possible.
The Conservatives rejected this claim, accusing the government of creating a "meddling and interfering bureaucracy".
"The government will now hold universities to ransom, in an effort to further their social engineering agenda," said the Shadow Health and Education Secretary, Tim Yeo.
The setting up of the access regulator is part of the government's controversial overhaul of higher education funding.
The government has put forward legislation to raise tuition fees, as part of a package of measures intended to see more students, from a wider range of backgrounds, entering higher education.
By the end of the decade the government wants at least half of all young people to be graduates - and it is pushing for a better funded, more accessible university system.
And as a condition of providing universities with a higher level of income from tuition fees, the government is introducing the access regulator, to ensure that extra funding leads to more higher education opportunities for youngsters from less well-off families.
But opponents of tuition fees, including Labour backbench rebels, have argued that higher fees will deter people from entering university.
And the Conservatives say that setting up the access regulator will "do more harm than good to the university system".