The government is to complain to a financial watchdog over council adverts it calls a "blatant misuse of public funds", BBC London has learned.
Labour-controlled Lambeth in south London has erected posters saying: "The government has cut our money so we are forced to cut services."
The government says they are politically motivated and should not be taxpayer funded.
The council insisted the posters "state fact".
The flyers show a pair of scissors cutting into a blue-coloured pound sign.
They then urge the public: "Tell us what matters to you."
In the run-up to the general election, Labour-supporting union Unison published a poster depicting a blue-coloured axe with the slogan: "Look what's in the Tories' first budget."
Department for Communities and Local Government (DCLG) code of practice says council publicity "should not be a prejudiced or political attack on policies".
It continues: "Local authorities should not use public funds to mount publicity campaigns whose primary purpose is to persuade the public to hold a particular view on a question of policy."
Stephen Hammond, parliamentary private secretary to Communities Secretary Eric Pickles, said: "The advert is a blatant misuse of public funds.
"The government is not telling nor forcing Lambeth to cut services - that is a decision the council are taking.
"The money wasted on this scare campaign could have been spent on protecting frontline services."
Mr Hammond continued: "The government thinks local councils should be looking to protect frontline services by cutting back office operations and seeking efficiency gains.
"This advert is purely political and Labour councillors shouldn't be wasting taxpayers' cash on bankrolling politically opportunistic campaigns."
The government is demanding councillors repay money spent on the campaign and apologise for "an abuse of public money".
Mr Hammond suspects the choice of the colour blue in the poster was politically motivated.
The posters cost £600 to produce.
The council did not have to fund placing them, as it had free use of the advertising hoardings.
However using the posters means the potential loss of revenue from any private company using the hoardings.
Steve Reed, leader of Lambeth Council, said: "The posters state fact. Lambeth understands the government will be cutting our funding by almost £90m over the next four years, out of a total net budget of £310m.
"Because the government has frontloaded the savings, £37m has to saved in the first year alone.
"That means we are forced to make bigger cuts in frontline services than would be necessary if we had longer to manage the reduction in a more measured way."
He continued: "Government ministers are creating a smokescreen to cover up the scale of their cuts.
"They claim that cutting senior pay would resolve the problem, but even if we sacked all our senior managers it would not even save 1% of the amount we are being forced to cut."
BBC London has also discovered that the DCLG now intends to further tighten up rules on council publicity spending to avoid a repeat scenario.