Sheffield City Council is to shave £11m off the money it gives to voluntary, community and faith groups.
About £73m, 5.2% of the council's total annual budget, is currently spent on funding the groups.
The authority needs to reduce its overall spending by 15% and a spokesman said the groups' funding would be among those affected by the cutbacks.
About 1,200 organisations will be affected. A two-month consultation with them is under way.
The groups receive funding either as a grant or through a commission to provide a service to the council.
The council said some may end up with more funding than they currently receive, while others may get nothing.
'Fair and open'
Chief executive Lee Adams said: "Some organisations have got rather dependent on the council and expect to receive funding year after year.
"We have to review that now. Firstly, to be fair and open and also to make sure the money is spent in the best way it can be for the city."
Southey Green and Owlerton Area Regeneration, a voluntary organisation which helps people get back into work, receives about £100,000 from the council.
Manager Ian Drayton said: "It's been apparent for those in this sector that the level of grant has been coming down for a number of years.
"The organisations that are going to be penalised are the ones that go for the smaller grants, say £500 or £1,000, because that pot will be shrunk.
"I think there are going to be some losers and some winners in that reduction."
Christine Tooze, chief executive of Kickstart, a voluntary organisation which targets substance misuse, said: "We're having to re-tender for our own service next year which we initiated 17 years ago.
"We may lose that bid to a national organisation even though we built the service out of a gap in the market."
The council said final decisions would be made in February.