The Scottish Rugby Union claims it has not received the return of £1.4m from Edinburgh Rugby by the Friday deadline.
Bob Carruthers has offered to hand the club back to the SRU
Earlier, the SRU issued an ultimatum to Edinburgh to return the funds by the close of business on 3 August.
Rugby's governing body in Scotland claims Edinburgh have terminated their operating agreement with the union.
An SRU statement reads: "Scottish Rugby will review its options over the weekend to determine its next step to recover the outstanding funds."
The SRU has also withdrawn future funding of the Magners League club.
SRU chief executive Gordon McKie said: "Our main focus now is to bring this matter to a speedy conclusion, in the best long-term interests of rugby in Scotland."
Earlier in the week, a statement issued by the SRU had said: "Edinburgh Rugby no longer have any rights to play or train at Murrayfield.
"And Scottish Rugby has asked when they plan to vacate the stadium."
Edinburgh owner Bob Carruthers has claimed that it is the SRU that has engineered the dispute and vowed not to pay the money.
But the SRU stated: "As a consequence of Edinburgh Rugby's termination of the operating agreement, Scottish Rugby now requires immediate repayment of a proportion of the funding the governing body has advanced Edinburgh Rugby since July 2006.
I am coming to the position that it is untenable to be an independent club here in Scotland
Edinburgh owner Bob Carruthers
"Scottish Rugby can also confirm that, with immediate effect, it has withdrawn from making any future funding available to Edinburgh Rugby, following their breach of the operating agreement.
"Despite further efforts being made by Scottish Rugby this week to achieve an acceptable outcome to the dispute in the best interests of the sport, Scottish Rugby now confirms that, regrettably, these actions have had to be taken."
But Carruthers claimed that the SRU was attempting to force his club into administration so it can retake control.
"There's no such thing as an operating agreement," he told BBC Sport.
"There are three contracts - there's a business transfer agreement, which can't be terminated, it happened.
"There's a tenancy agreement, which can't be terminated - it's in force.
"There is a facilites agreement whereby SRU were due to pay monies to Edinburgh.
"They failed to pay the monies and therefore have rescinded the contract."
Carruthers claimed that it was an attempt by the SRU to avoid declaring the money at its annual meeting.
"The total amount of the facilities over the five years was £8m and that would have to be shown in the accounts," he said.
Carruthers believes that the SRU has realised that it had entered into an agreement that it could not afford.
"They are trying to engineer a dispute so they can ask for the money back, but you can't just bully people and behave like this," he said.
Carruthers again offered to resolve the dispute through mediation but predicted that it would end up being resolved through the courts.
He and brother Alex took control of the club in July 2006.
They claim that the SRU owes them money from Magners League and Heineken Cup fees from last season.
Edinburgh are due to begin the Magners League season in September and a question mark hangs over their participation.
"Edinburgh Rugby will still be in business," added Carruthers. "Whether or not they will be playing rugby is open to question."