Increased state provision of free childcare could reduce the choice available to parents, employers say.
The CBI welcomes expansion but wants better controls
A report from the Confederation of British Industry says the problem is the government's failure to limit heavily subsidised state provision.
It argues this renders private and voluntary facilities uneconomic, thus reducing available places.
The Department for Education and Skills says councils should focus on covering gaps in the market.
The CBI report, Children first: the power of choice in children's services, agrees that the government is meant to be stimulating the creation of places where current provision is poor.
But it says the money is often poorly targeted.
The government has already subsidised 45,000 new nursery places in poorer areas, it says.
It plans to establish 3,500 children's centres by 2010 and use lottery funding to create 300,000 childcare places for school-age children.
State funding for childcare will have risen from £1.1bn in 1996-97 to around £5.5bn by 2007-08.
"This has already led to an increase in net provision of some 525,000 childcare places, but there is an extremely high level of business failure in the sector," says the CBI report.
Between 1999 and 2003, 626,000 places were created in England but 301,000 closed.
The report says rates of failure will increase without clear leadership from the government on how the market should develop.
CBI deputy director-general John Cridland said there had to be a level playing field that allowed for all providers, otherwise reforms - which were welcome - would not work.
Ministers said they wanted "a transparent and fair marketplace", he said.
"It's time for them to make it happen.
"Childcare providers being forced to desert the market is the last thing anyone wants to see."
The chief executive of the National Day Nurseries Association, Purnima Tanuku, said: "The duplication of childcare places and the lack of a partnership approach from some local authorities in the creation of children's centres is endangering many day nurseries in the private and voluntary sectors."
An education department spokesman said its policies were bringing an unprecedented increase in childcare benefiting millions of parents, not a decrease.
There were 1.2 million more places than eight years ago and the closure rate was down from 14.2% in April 2005 to 13.1% in the first six months of 2005-06.
The contribution of the private and voluntary sectors was "vital" and the government was determined they should continue to play a full part.