Ysgol Cedewain caters for children with special needs from throughout north Powys
A school for children with special needs warns it will have to turn potential pupils away because of a £130,000 shortfall in its budget.
Ysgol Cedewain in Newtown, Powys, said it could not replace teachers who had left, and it fears that its high standards could drop.
Head Peter Tudor said the shortfall was down to a "totally unfair" funding formula introduced by Powys council.
The council said the issues raised by Mr Tudor were under review.
The head teacher said it was inevitable Ysgol Cedewain would receive less money after the budget settlement Powys council received from the Welsh Assembly Government.
The authority was awarded a 1.5% cash increase, but it was below the Welsh average of 2.9%.
Mr Tudor said: "What we did not expect was the effect of the introduction of fair funding formula which further reduced the funding to Ysgol Cedewain by £102,856."
He said the school also had to absorb a further cut of £31,232, which would have been awarded to Ysgol Cedewain for taking extra pupils who started in September.
He added: "The school has the same management team as before using the same criteria to meet pupils' needs yet we are having to reduce staff and reduce resources.
"The financial difficulties we are now experiencing has to be seen against the last Estyn inspection in which the school was awarded seven grade ones - the highest possible score."
Mr Tudor said the fair funding formula was "totally unfair to Ysgol Cedewain".
He added: "Ysgol Cedewain has always offered a place to pupils on the basis of their individual special needs - funding has followed the pupil to allow them to benefit from their education.
"Because this no longer happens the school has been told it cannot accept any more than a maximum of 110 pupils.
"This means we will have to turn away even children with the greatest medical or educational needs. The school is here to offer this service to families and does not believe it should deny a child its rights to appropriate education."
Mr Tudor said the demand for places at Ysgol Cedewain was growing.
But he added: "If the overall standards of provision fall because of reduction in funding and the school is not allowed to offer places to new pupils it is inevitable that parents will opt for more specialist schools at a massive cost to the education budget."
Powys council said it made changes to the fair funding formula for special schools at the start of the current financial year following an "exhaustive round of consultation meetings".
A spokesman added: "The new formula is based on the number of staff required to meet the curricular requirements of the learners in each of the three special schools.
"The authority used the actual historic staffing ratios supplied in Cedewain for both teachers and support staff as a basis for the new funding."
He added that the issues raised by Ysgol Cedewain were being reviewed and a meeting was planned for December.