The 2012 Olympic Games will drain away up to £440m from London's sport and arts groups, a report shows.
The cost of hosting the Games stands at £9.3bn
In June the government said £2.2bn raised by the National Lottery will go towards funding the London Olympics.
But the London Assembly culture and sport committee report said diverting funds may do more harm than good.
Chairman Dee Doocey said it was ludicrous that the grassroots groups that encourage children into sport and the arts will miss out.
Both the Cultural Olympiad - a four-year programme of events aimed at increasing participation in cultural activity - and the Government's Olympic sports participation target - to increase the number of people who are physically active by two million by 2012 - were identified as being heavily dependent on smaller grassroots organisations.
But the report, by the assembly's economic development, culture, sport and tourism committee, said it was these very organisations that would be hardest hit by the funding diversion.
It estimated that of the £2.2bn being taken from lottery causes to contribute to the £9.3bn needed to host the Games, London will lose about £440m.
Ms Doocey said: "We are not denying that the capital will reap huge benefits as host city of the 2012 Games.
"However, our investigation shows that the on-the-ground opportunities Londoners were promised are at risk because the funding diversion effectively ham-strings the organisations needed to deliver them."
She said that while it was not yet clear who would lose what, their research suggested that smaller organisations would suffer the most.
The investigation was launched in response to growing concern from lottery-funded organisations about the impact of the funding diversion.