COUNCILS in the North-East face the prospect of putting up council taxes or cutting services to plug a £4m shortfall in funding next year, it was revealed yesterday.

The Association of North-East Councils, which represents the region's 25 local authorities, says it is to step up lobbying of ministers and the region's MPs to urge the Government to reconsider proposed changes to the funding formula, which it believes could damage the region's economy and widen the North-South divide.

The body has been pressing for a fairer funding deal for the region, which it reckons could have seen the region £125m a year better off - but, instead, it calculates that the Government's draft Local Government Finance Settlement for 2006-07, announced on Monday, will actually see the region substantially worse off.

Councillor Mick Henry, leader of Gateshead Council and chairman of the association, said: "Once again, the settlement is very disappointing, not just for our local authorities, but for the region as a whole."

The settlement saw the North-East receive the lowest average increase of any region in the country - a 2.7 per cent rise compared to an English average of three per cent.

However, when the extra costs of dealing with new council responsibilities, including licensing are added in, the association believes the region's councils need another £4m a year just to stand still.

The figures vary greatly across the region - while a two per cent rise is being proposed for Newcastle and Sunderland, Wear Valley would get an 8.1 per cent rise and Sedgefield would get a 5.7 per cent increase.

At Durham County Council, where the authority is being offered a 2.7 per cent rise, a spokesman admitted it was facing some "tough decisions" in the coming 12 months.

The association insists the settlement jeopardises work to end economic disparities between the regions, and insisted it would continue to lobby the Government ahead of the final decision on January 11.

Coun Henry said: "Such a poor settlement for the region's local authorities risks widening the North-South divide."