There is concern in Israel's Ministry of Immigrant Absorption that it may have to scale back or disband a programme that ensures free university tuition for young immigrants.

The Jewish Agency plans to stop its annual contribution of 16 million shekels (£2.7m) to the fund that pays tuition fees for the immigrants this year, according to spokesman Haviv Rettig Gur. Currently, 7,000 students benefit from the fund.

A source in the Ministry of Immigrant Absorption said that the loss of about a sixth of the fund's budget will have a major impact. "The students will probably be hurt," he said.

Mr Rettig Gur said that the Jewish Agency has received hundreds of emails from concerned students, but insisted that they have no cause for worry. "We will not pull out until the government finds the money," he said.

The Jewish Agency is in talks with government about handing over other aspects of immigrant absorption. In an interview with the Jerusalem Post this week, its chairman, Natan Sharansky, presented this as an important process that cuts to the heart of the changing Israel-diaspora relationship.

"In 1948, the government's budget was small and the Jewish Agency's was bigger, now Israel is a strong country and world Jewry is less rich proportionally," Mr Sharansky said.

But however well-principled funding changes are, groups that represent immigrants fear that, in practical terms, they may harm their constituents.

Josie Arbel, director of absorption services at the Association of Americans and Canadians in Israel, said that she sees the tuition grants as especially important because they not only help immigrants after arrival, but also act as an "incentive" for many to make aliyah.

The Jewish Agency is stopping its subsidy "not because of a lack of funds" but rather due to a "policy decision", Mr Rettig Gur claimed. Over the past two years, the agency has started to shift its priorities away from absorbing Jews and towards promoting Jewish identity and education in the diaspora - meaning that its officials have come to view subsidies like those given to the education fund as anathema.

"We're a charity; I don't think overseas donors need to help a government programme," said Mr Rettig Gur.