Winchester civic chiefs are warning services may have to be cut to head off a projected budget deficit.

The authority will know the extent of the problem by Christmas, when the government announces how much financial support it will give local authorities.

A review of key departments has now been ordered to investigate where money could be saved.

Leader of the City Council Sheila Campbell made the gloomy prediction to her Cabinet, adding: "Let's hope for a nice present from Santa."

Winchester City Council says it is being squeezed between insufficient government grants and the threat of a capping of tax rises which could leave it with big shortfalls.

That black hole may only be filled by cutting services in 2006-07, the council has warned.

A predicted shortfall of £700,000 in next year's budget could be bridged, councillors were told, but the deficit could more than double to £1.5m the following year.

Cllr Campbell said: "We are sitting on the floor and the government could decide to kick the floor away from under us."

The Cabinet heard that department managers were being asked to outline the 20 per cent least important work that each section undertakes.

City councillor Kelsie Learney, portfolio holder for finance and resources, stressed that the review did not mean the council was looking to make 20 per cent of cuts. But service reductions from next spring are being considered.

The council will learn more when the government announces its level of grant in December. For the first time they will be telling councils what support they will get for the next three years, which should allow better forward planning.