The merger of Bedford and Luton hospitals has suffered a major setback with the government refusing to stump up £100m to pay for the project.
Now the NHS is looking for other “pots of capital funding” to carry out the necessary work.
Both hospitals say the merger will still go ahead as planned, but local councillors are expressing doubts.
The £100m was mainly to finance the building of a new block containing a maternity suite and neo-natal unit at L&D hospital.
It would also have paid for new L&D operating theatres and the merger of the two hospitals’ pathology departments.
The bid, which formed a “significant part” of the merger plan, had already been scaled down from £150m to £100m.
The Treasury’s refusal was reported to Central Beds councillors this week by the Clinical Commissioning Groups’ joint accountable officer Patricia Davies.
She said: “You’ll be aware that Bedford Hospital and the Luton and Dunstable put in a bid for capital funds. They were unsuccessful in receiving those funds.”
Ms Davies added: “But both NHS England and NHS improvement are very keen to look at and explore other pots of capital funding.”
Stephen Conroy and David Carter, the respective chief executives of the hospitals, were “keen” to continue with the merger, she said.
“We are supporting both trusts in that endeavour...There are certainly no plans to close Bedford Hospital or to take services away from it in its current form.”
Councillor Mark Versallion described the situation as “very frustrating”.
“Our STP is one of the better prepared STPs in the country... But we still can’t get a fairly obvious capital bid approved,” he said.
Bedford MP Mohammad Yasin said: “The government is failing our local hospitals and NHS. The success of this merger, which we have been told is essential to the survival of both Trusts, is dependent on adequate funding for the necessary improvements to both sites.”