The memo from Sarndrah Horsfall, chief of staff to chief medical officer, Sir Liam Donaldson, tells managers to freeze spending and warns that they can be disciplined for failing to follow through. She also says that they should disregard any promises of additional funding from Cabinet ministers.
The Observer said that it has also learned of numerous cost-cutting measures, including delaying elective surgery.
The fiscal crisis threatens efforts to prepare for a possible flu pandemic and deal with outbreaks of infection in hospitals, the newspaper said. A recently announced alcoholism treatment program, tied to a new law extending opening hours for pubs, could also be a victim.
Health Secretary Patricia Hewitt has defended cutbacks at the NHS, blaming waste and inefficient practices for financial problems.
"What is disturbing about this disclosure is that key public health priorities will suffer," said Andrew Lansley, the Conservative Party's shadow health secretary. "It appears pre- and post-election promises by ministers will prove not worth the paper they are printed on."