Ministers had signed a deal to back the rally until 2011
The future of this year's Wales GB Rally is in doubt after the assembly government withdrew £2.2m a year funding.
Organisers say they were "shocked and disappointed" at the move, despite a contract to back the event until 2011.
International Motor Sports Ltd (IMS) plans to sue for breach of contract.
The assembly government said the 2010 rally without world rally championship qualifying status was "not the type of event" it had agreed to sponsor.
In a statement, IMS said the 2009 rally was now "under threat".
It said: "This unprecedented action towards WRGB by the Welsh Assembly Government has been instigated without any prior notice or consultation.
In fact the Deputy First Minister, Ieuan Wyn Jones, himself noted the importance of the event in 2007
IMS chief executive Andrew Coe
"It is in breach of the existing contract between IMS and the Welsh Assembly Government that was signed on 30th March 2006 for the period up to and including the 2011 Rally.
IMS chief executive Andrew Coe said: "Our preparations for October's Wales Rally GB are progressing well, with the event scheduled to be launched to the media and public by the end of April.
"Therefore we are shocked and disappointed that the Welsh Assembly Government has taken this position, without even any prior notice or discussions between us, particularly as there is a firm and binding contract in place until 2011.
Mr Coe said the event had met "and in many cases exceeded" performance indicators laid down by the assembly government under the terms of the deal.
He said the rally, which has several stages across south and mid Wales, was looking forward to continuing its "extremely positive relationship" with the team at the assembly government.
The assembly government has said it will withdraw £2m from the Wales GB Rally
"In fact the Deputy First Minister, Ieuan Wyn Jones, himself noted the importance of the event in 2007 when he said 'The event ensures a high profile for our country and helps drive forward continued growth of our automotive sector,'" said Mr Coe.
According to a cabinet paper from last October, assembly government support for the Wales Rally GB is £2.2m for each of the three financial years from 2008-2009, with funding from the department for economy's budget.
An assembly government spokesman said: "Wales Rally GB was intended to have World Rally Championship qualifying status each and every year.
"But as a result of a Federation International de l'Automobile decision this is no longer going to be the position.
"In particular, the 2010 event is not going to have qualifying status and as such is not the type of event which it was agreed that the Welsh Assembly Government would sponsor."
But Conservative heritage spokesman Alun Cairns AM said the decision undermined the assembly government's commitment to attracting major sporting events to Wales.
"Only yesterday ministers were talking up the importance of the Ryder Cup to the Welsh economy and to tourism," he said.
"Twenty four hours later those same ministers pulled the plug on £2m in funding for an equally prestigious event which Wales has hosted with distinction for many years."
A Cardiff Council spokesman said if true the council was "both surprised and disappointed" as the rally is a "major economic vehicle for both Cardiff and Wales".
The rally has several stages across south and mid Wales
"We understand the assembly government and IMS had entered into a contract which runs until 2011 and we will work with both organisations to try and ensure this successful event continues in Cardiff and Wales until, at least, that date," said the spokesman.
Liberal Democrat economic development spokeswoman Jenny Randerson AM said if Wales Rally GB were right they had a contract until 2011 then the decision was "truly astonishing".
"If legal action is successful, then it will end up costing the taxpayer and the stretched public purse even more than it would have done by continuing the funding," she said.
Former Welsh Secretary Peter Hain, a keen motor sport fan, said he was "horrified" and said the funding had a multiplier effect which was worth five times more in spending on the local economy.
He urged a rethink and said he was writing to First Minister Rhodri Morgan.
Last December, a report to ministers warned Wales had to "raise its game" if it was to become a serious player in the global market for major events.
The news comes a day after the assembly government decided to relinquish one of its two hospitality boxes at the Millennium Stadium when the current contracts expire later this year.
The boxes, which are located in prime position on the halfway line in the stadium were inherited by the assembly government following the 2006 merger with the Welsh Development Agency and the Wales Tourist Board, who used the boxes to entertain potential investors.
Since February 2007, they have been used for the twin purpose of entertaining key potential business investors in Wales, but also to reward and recognise those who have given outstanding service to the community.
According to the assembly government, the two boxes have, over the past five years played a part in generating about 1,500 new jobs promised by inward investors, many of them being high value jobs paying high value salaries.
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