Winchester City Council may have to deal with a budget deficit as high as £900,000.

Director of finance, Sheila Boden, told cabinet members the main reason was the drop in interest rates and consequent loss of investment income after the terror attacks in the USA.

"Interest rates are volatile and small changes make a big difference. Since September 11th, they have fallen dramatically. That's had a big effect on our budget, with losses of £500,000 on what we expected."

She added that, with the inclusion of other factors, the deficit could be £900,000, meaning committees having to cut their budgets.

Sheila Campbell, vice-chairman, said: "We are having to be quite ruthless. Committees will be told to find the money from within their budgets.

"We have reached the point where we have to cut into the base budget. Members need to put hard hats on when they consider a project and ask themselves if they really need it."

She said that one thing the council would also have to consider was a sharp increase in insurance premiums, again resulting from September 11th and affecting all authorities.

"Insurance companies say increases could be between 30 and 100%," she added.

Detailed budgets by committees will be considered in February, when the cabinet will decide on the new tax to recommend to the full council.