HOUSEHOLDERS are facing increases in their council tax bills of about £100 or drastic cuts in services because of a change in Government funding, local authority leaders warned last night.

Council chiefs say the region will be shortchanged by more than £250m over the next four years if the new system is given the go-ahead.

The Association of North-East Councils said it is lobbying the Government for a change of heart over the new formula grant distribution system, which will determine the amount of money given to each of the region's 25 local authorities.

It says the Government's proposals would cost the region's councils £67m a year, leaving the authorities facing a choice of putting up council tax by about ten per cent or cutting services.

It is lobbying MPs and officials to put the case for an alternative funding package, which it says would be worth an extra £120m a year to the North-East, partly by ending the area cost adjustment which channels extra money to London and the South-East to cover the higher cost of living in the capital.

Association chairman Councillor Mick Henry, leader of Gateshead Council, said: "The Government's decisions on changes to this formula could be hugely significant for the future of the region.

"We are not seeking handouts or special treatment, but it is well known that the North-East is one of the poorest regions in the country."

The association says that much of the problem is that the Government intends to base funding for services on historical population trends rather than actual population changes.

The shift will hit the North-East particularly hard - up to £11m a year - because, despite a recent population increase, for many years before that it had suffered a gradual decline.

Worst hit would be Middlesbrough, where the Government's data assumes the population has fallen by 2,700 while it has in fact increased by 2,900.

In Durham City, the population has risen by 1,500, but the Government is assuming it will have fallen by 100, while in Darlington it has risen by 100 - the Government has assumed a fall of 1,600.

The change will not have such a dramatic impact in North Yorkshire because it has seen a gradual population increase since the beginning of the 1990s.

The Office of the Deputy Prime Minister is expected to announce its decision on future funding next month.