Organisers of the 2012 London Olympic Games have discovered they may be facing a huge additional tax bill.
VAT on construction work was not included in the original bid
Tory Olympic spokesman Hugh Robertson said the government had assured him the £2.38bn cost of construction sites would not be subject to VAT.
But the Treasury is demanding the tax, and has said European regulations state it cannot be seen to be supporting the organisers of the event.
It is in discussions with the Olympic Delivery Authority over the matter.
When the London bid was submitted to the International Olympic Committee in 2004 it included an estimate for building various sites in east London.
It estimated the cost at £2.38bn, but that did not include VAT on construction work or other costs.
Mr Robertson said forcing the Olympic organisers to pay VAT at a rate of as much as 17.5% would be devastating.
He said: "The issue of VAT on the Olympic sites was raised by the Conservative Party during the passage of the London Olympics and Para-Olympics Bill, and we received specific undertakings from the government that the Treasury would waive these costs.
"It would be catastrophic if (Chancellor) Gordon Brown were to renege on that commitment now."
A Treasury spokesperson said: "We are in discussion with the DCMS (Department of Culture, Media and Sport) and the Olympic Delivery Authority (ODA) issues and we are confident we can find a way forward.
"But it would not be helpful to give a running commentary on those discussions."
Mayor of London, Ken Livingstone said: "It would be wrong for there to be any further council tax increase, I will not be proposing or making one, so there will not be one."
Officials at the Olympic Delivery Authority declined to comment.