The poorest performing universities may have to be closed so as not to hinder more successful institutions, a business leader warns.
Richard Lambert, director-general of the CBI, said ministers should consider axing weak universities as they press ahead with public spending cuts.
Mr Lambert said a small number of institutions were already "in serious financial difficulty".
He said bailing them out could be at the price of better institutions.
In a speech at Sheffield University, Mr Lambert said "a large cohort" of universities were heading for "very big trouble".
"What would the government do about it?" he asked.
"Would it take the politically explosive but probably economically sensible decision to close or merge the worst run institutions? Or would it instead attempt to bail them out?
"That would mean the already reduced quantities of jam having to be spread even more thinly across the system, making our best universities pay the price for the incompetence of the worst."
The coalition government plans to cut £200m from the higher education budget as it seeks to reduce the national deficit.
A review of university finance, by former BP chief Lord Browne, is currently underway and is due to report in the autumn.
His recommendations are likely to lead to an overhaul of student fees, loans and grants.
Many university vice-chancellors are pressing for the current cap of £3,250 on annual tuition fees to be raised or even scrapped.
Mr Lambert also raised concerns about attracting more students from less privileged backgrounds into higher education.
"University education should be open to those with the capacity and ambition to undertake it, whatever their social and economic background," he said.
"Any other approach would be both socially unjust and economically inefficient, in the sense that the nation's human capital would not be being developed to its full potential."
Universities had more to do, he said.