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The request provoked a hostile reaction. Abertay complained of an "unprecedented degree of direction" by the funding council while Dundee stressed that there were "significant differences" between the institutions.

The SFC said that it had no power to force through mergers. However, Holyrood's pre-legislative agenda, released two weeks ago, proposes giving ministers the power to compel universities to merge if recommended by the funding council.

The paper also says there is "room for some consolidation" in Scottish higher education, highlighting "overlaps in provision" in urban areas. A spokesman for the University and College Union Scotland warned that mergers "don't work if they are forced", adding that as the universities had many overlapping courses, the move "could essentially be a closure" of Abertay, with "significant redundancies".

The SFC's intervention came as universities in Scotland celebrated the announcement of a 14.6 per cent rise in higher education funding over the next four years. The increase announced last week by John Swinney, the Scottish National Party finance secretary, will amount to an extra ?135.5 million for teaching and research by 2014-15, although teaching funding will drop by 11 per cent in 2011-12.

Universities Scotland said that the teaching funding gap that could have opened up with England "has been closed" by the extra money, as well as by efficiency savings and income from charging students from the rest of the UK up to ?9,000 a year. Steve Chapman, principal of Heriot-Watt University and convener of Universities Scotland's funding policy group, said the government was "to be congratulated". "Given the economic climate, this is a massive commitment to universities," he said.

But capital spending for both higher and further education was slashed, from ?91 million in 2011-12 to ?56.4 million in 2014-15. The SFC will also have its administrative budget cut by ?500,000 by 2012-13.

david.matthews@tsleducation.com.