One-third of the state's community-based preschools face closure under a new funding model for early childhood education which strips funding for three-year-olds to focus greater resources on four- and five-year-olds.
The model, to take effect next year, could also force fee rises of more than $15 a day in more than 50 per cent of centres, according to research by the Community Child Care Co-operative (NSW).
Preschools most at risk are in the Sydney metropolitan area, including the north shore, southern suburbs, Blacktown and Penrith.
The Community Child Care Co-operative, along with large not-for-profit providers such as KU Children's Services and SDN Children's Services, have raised the alarm in a joint submission to the state government.
Under the proposed model, the only three-year-olds who will receive a fee subsidy are those from disadvantaged backgrounds.
The joint submission describes the removal of funding for three-year-olds as "as a retrograde step [that] may have the unintended consequence of threatening the viability of services".
It is crunch time for the state's 800 community-based preschools, which serve about 32,000 children, as many will set fees for next year in September or October.
Leanne Gibbs, chief executive of the Community Child Care Co-operative (NSW), said three-year-olds make up between 30 and 50 per cent of enrolments at the majority of preschools.
"If those places are not funded, it will make it less attractive for people to use preschool for two years before school," she said. "People will look for other alternatives, and there aren't many other alternatives out there."
The co-operative supports funding for three-year-olds from disadvantaged backgrounds but says extra resources should be made available for all three-year-olds.
Federal and state government policy aims to provide all children with up to 15 hours a week of early childhood education in the year before they start school but Ms Gibbs said research shows that children perform better with two years of preschool.
Engadine Preschool Kindergarten president Ross Holland described the move as "essentially robbing Peter to pay Paul, and Peter's education goes down".
Fees at the preschool would increase from $45 a day to $83 a day under the new funding model. Parents who use community-based preschools are not eligible for the 50 per cent childcare rebate.
"It's a pretty steep increase and it means families will be displaced," Mr Holland said. "They will have to look at long day care or just keep their children at home and withdraw from the workforce."
Opposition education spokeswoman Carmel Tebbutt said the NSW government had provided additional federal funding to increase preschool participation and there was no need to withdraw funding for three-year-olds.
"Preschool operators are telling me that these changes are threatening their viability, as they won't be able to fill all their enrolments," she said.
The new model will be introduced next year following recommendations from Professor Deborah Brennan at the University of NSW Social Policy Research Centre. Her review of funding for early childhood education found that funding programs were poorly targeted and that almost 15 per cent of the state's children was missing out on preschool.
A spokesman for Education Minister Adrian Piccoli said the funding reform would reduce fees for four- and five-year-olds by up to 26 per cent across NSW and give three-year-olds from disadvantaged backgrounds two consecutive years of preschool at the subsidised rate.
He said preschools which end up with less funding under the new model would be eligible for support to help with the change.