The National Eisteddfod has been told it needs to find an extra £188,000 a year to balance the books.
The eisteddfod is one of Europe's biggest cultural events
The independent financial review by Grant Thornton has also revealed the event faces debts of £111,000 - despite increased savings and sponsorship.
The Welsh Language Board, which commissioned the study, met on Friday to search for solutions.
Last year, the eisteddfod received £160,000 from the board and the Welsh Assembly Government to avert a crisis.
The eisteddfod council will discuss the problems at a meeting on Saturday. It will also be deciding a location for the 2007 event.
The National Eisteddfod, an annual celebration of Welsh-language music, dance, poetry, and art, is one of Europe's biggest cultural festivals.
The event is a showcase for the Welsh language
Last year, the eisteddfod made a loss of £291,000 after the event was held in Newport, while the 2003 National Eisteddfod in Maldwyn generated a surplus of just £3,000.
Elfed Roberts, director of the National Eisteddfod, said the 2005 eisteddfod in Eryri promised to be the most successful in its history.
"There will be more activities on the Maes and more stalls than ever before," he said.
"The local fundraising target has already been met, and we have attracted record levels of private sponsorship.
"This is due to the tireless work of the Local Working Committee and to the dedication of our staff.
"I now look forward to working with the Welsh Assembly Government and the Welsh Language Board to secure long-term, sustainable funding for the eisteddfod, so that we can build on our success over previous years and continue to go from strength to strength."
The Welsh Local Government Association has reaffirmed its commitment to securing the long-term future of the eisteddfod.
A statement on Friday said that the association was seeking an urgent meeting with the eisteddfod council and the WAG on the matter.