Winchester civic chiefs fear their hopes for building hundreds of new homes for rent could be dashed.

The council was looking forward to using its debt-free status to expand its social housing programme and provide homes for people on the waiting list.

But it has been rocked by suggested changes to the complicated system of funding that could penalise councils such as Winchester, which have managed their houses successfully.

Among the main changes is the formation of a regional pool from the proceeds of council house sales that will then be disbursed according to need. That would almost certainly mean a reduction in the amount of cash Winchester can spend.

Senior councillors said Winchester could suffer because it had followed Government encouragement to pay off its debts which it achieved in March.

Housing chairman, Dominic Hiscock, said in cabinet on Wednesday: "This blows a hole in our plans. It is devastating the effect this is going to have on people on the waiting list."

Sue Nelmes added: "This council has done what it could to build homes, but is penalised for having done what it should have done.

"Those authorities that have failed are going to take money we need to provide housing in an area so expensive people can't afford to rent a room."

Kelsie Learney said: "We are going to lose power to help people in desperate housing need."

She wondered if the Government was trying to force councils into giving up managing homes and transfer them to housing associations.

Tenants in Winchester overwhelmingly rejected such a transfer in the late 1990s.