Funding cuts to two scholarship schemes for foreign students will hugely impact on British universities, say critics.
Overseas students are a valuable asset to UK universities
The cuts - amounting to £10m a year - were announced by the Foreign Secretary David Miliband.
Universities UK says the decision contradicts a government commitment to attract the best students to the UK.
The government says it will offer a smaller programme and the savings will support "priority programmes" such as climate change.
Universities UK has written a letter to the Foreign Secretary expressing its concerns and to seek a meeting to discuss the impact of the funding squeeze.
They believe it will not only deter foreign students from applying for a UK university place, but it could jeopardise opportunities for UK students to study abroad.
The cuts involve a reduction in the Chevening scholarship programme from £27.3m in 2007/08 to £18.86m this year and an end to the Foreign and Commonwealth Office (FCO) contribution to the Commonwealth Scholarship and Fellowship plan from 2009/10.
The funding for these scholarships enables more than 1,500 international students to study in the UK each year.
In a written ministerial statement announcing the cuts, Mr Miliband said: "We propose a smaller, better organised programme, focused on the leaders of tomorrow, from a wide range of backgrounds.
"The savings we make from this reform will support new priority programmes, principally on climate change."
There are tangible success stories from the scholarship schemes with many previous scholars going on to become leaders and decision makers such as high court judges, university vice-chancellors and politicians, according to Universities UK.
The list of beneficiaries includes a current European Commissioner and a deputy prime minister of a Commonwealth country.
UK students 'hit'
Universities UK chief executive Diana Warwick said: "Scholarships are still viewed very positively by overseas governments and prospective students.
"Many scholarship students go on to be leaders in their fields, retaining valuable links with the UK and acting as ambassadors for our universities.
"Part of the justification for cutting one of the programmes relates to a catalogue of failings committed by the FCO in the direction and administration of the scheme.
"It seems unfortunate to respond to these failings by cutting funding for the programme rather than seeking advice from universities and relevant bodies about how the scheme could be improved."
Ms Warwick said: "The government has done a great deal to promote the UK as one of the leading destinations for international higher education but a decision such as this risks sending mixed messages to universities and prospective students.
"These cuts will have an impact on a large number of universities across the sector and goes contrary to the commitment to attract the very best to the UK."
Mr Miliband pledged to maintain a global scheme, but the scholarships will focus particularly on countries such as China and India "which are going to be most important to our foreign policy success over coming years".
He said: "We will select more carefully to ensure our scholars really are potential future leaders, with our heads of mission having personal responsibility for ensuring their posts are getting this right.
"We will work to ensure we are drawing from the widest possible pool of potential scholars."
The number of overseas students studying at UK universities rose to 330,000 last year - one in seven of the total university population - with a significant increase in students from India and China.
Overseas students have become a lucrative source of earnings - contributing an estimated £10bn each year to the UK economy, according to figures from the Higher Education Statistics Agency.