Train to Gain has run out of money to help employers train staff and take on apprentices in some parts of the country, the British Chambers of Commerce (BCC) has claimed.
The employer's body said the Learning and Skills Council (LSC) had been left in the "absurd position" of being forced to turn employers away because of its financial situation. The government has now also capped the number of apprenticeships and amount of workplace training it will support in some UK areas, after being swamped by demand, it said.
Last month, warnings were sounded by colleges that Train to Gain was in danger of running out of money, just months after the LSC underspent on its 2008 budget by more than £200m.
David Frost, director-general of the BCC, criticised the government for mismanaging the need for training in the recession.
"Employers understand that investing in training is crucial, especially during a downturn, then virtually overnight they are being told: 'stop, we don't have the money to fund it'," he said.
"With training providers now having to turn away employers who wish to train their staff, many are asking how the LSC could have so badly taken its eye off the ball?"
A spokesman for the Department for Innovation, Universities and Skills (DIUS) said negotiations between the LSC and training providers were in hand to get the best value for money from training programmes.
"The Train to Gain budget is not being cut, but an increased demand has meant that we are reverting to the normal practice of asking providers to work within maximum contract values for the rest of the academic year," she said.
A BCC spokesman refused to specify which areas in the UK were worst affected by the Train to Gain overspend, as the organisation's members wished to remain anonymous.