A row has erupted over plans to slash South Gloucestershire Council's bus budget by £340,000, in a shake-up of grants covering the cost of giving pensioners free travel.

The cut is proposed under plans by the Department for Transport to redistribute money available to councils to pay for the national concessionary travel scheme.

But the reduction for South Gloucestershire for the 2010/11 financial year would be the biggest loss for any council outside London and furious councillors are demanding a re-think. They said the scheme, which gives free off-peak travel on buses anywhere in England for the over-60s, should be Government-funded, but South Gloucestershire had already used £1.1 million of local money to support the project.

A further £340,000 cut in central funding would take the annual shortfall up to nearly £1.5 million.

It is also likely to scupper hopes of introducing a new service to help many rural areas around the district.

The council had been poised to bring in an experimental scheme for on-demand buses, similar to the Nippy Bus in Somerset, where buses have a core route but can be booked to pick up or drop off anywhere within a wider area.

That project might have to be put on hold if there is no money to support it.

The council is especially angry because the unexpected cut comes despite 2010/11 being the third year of a supposedly three-year funding settlement that was designed to give councils certainty.

Brian Allinson, South Gloucestershire's transport chief, said: "We support the free bus scheme because it has benefited many local elderly and disabled people. But the Government is failing to ensure the scheme is fully funded in total and at individual council level.

"The council is already using council tax payers' money to cover insufficient Government funding for the scheme.

"Now we face the prospect of this shortfall jumping to nearly £1.5 million because ministers will not honour their funding settlement.

"Considering we are already one of the lowest funded councils of our kind in the country, a last-minute cut of this enormous scale is deeply unfair.

"It calls into question our plans to further improve public transport in the district, particularly the introduction of new demand-responsive bus services. At this stage, I cannot see any way that the council could simply absorb such a massive and sudden cut."

Mr Allinson is pressing to establish the reason behind the cut and has promised a "robust" response.

The on-demand bus service trial would have helped people in Hinton, Dyrham, Doynton, Charfield, Cromhall, Olveston, Frampton Cotterell, Coalpit Heath, Rangeworthy and Engine Common.

Sandra Grant, whose Boyd Valley ward would have benefited, said: "Demand-led bus services would have a useful role to play in filling the long-standing public transport gap that has existed in our rural areas for years. It is hugely disappointing that just as the council attempts to introduce such innovative new services, Government ministers are pulling the funding rug from beneath it."

On-demand buses work by following a set route but diverting to pick up passengers who live off that route who have earlier contacted operators to say they want to catch the bus.