Charity Kids Company has reportedly told ministers it will close – just days after it received a £3 million grant from the Government.
The youth organisation has been hit by allegations of bad financial management, prompting its high profile founder Camila Batmanghelidjh to quit as chief executive.
Ministers agreed to give the extra cash to help restructure the charity despite objections from a senior civil servant who warned they did not think it would be "value for money".
Fears have been raised about what will now happen to the 36,000 children and young people the charity helps across London, Bristol and Liverpool.
The BBC reported that Government officials, charities and local authorities have been briefed on the likely impact the charity's closure would have.
Mayor of London Boris Johnson said "there have been questions raised about some of the financial management of the organisation" but stressed the charity has done important work for troubled children.
He told BBC Radio 4's Today programme: "It's a great shame that it doesn't seem to be working in the way that I think everybody who supports the idea would like.
"What I want to happen is to ensure that all the kids who've been receiving care and attention from Camila and her team will have some kind of safety net."
The charity operates nine centres and two therapy houses supporting vulnerable, inner city children.
Kids Company received the £3 million grant from the Cabinet Office last week after agreeing, on the orders of the Government, to make changes in its leadership, management and governance.
But Ms Batmanghelidjh is said to have emailed staff within the charity last week to say they would be paid using some of the grant money.
In emails seen by Newsnight and Buzzfeed News Ms Batmanghelidjh told staff: "I just want to let you know that we have just received our funding from the government and are processing payroll right now."
The charity told the BBC: "Kids Company's July payroll was two days later than usual whilst we waited for a grant from the Cabinet Office to arrive."
The BBC reported that the Cabinet Office is making plans to claw back the grant because it believes conditions attached to the use of the money were not met.
Whitehall officials took the rare step of requiring a written, direct order from ministers before agreeing to the funding lifeline for Kids Company amid concerns about how it would be spent.
Cabinet Office Permanent Secretary Richard Heaton requested the order - formally known as a ministerial direction - on June 26.
He told ministers: "The experience that this department has of the charity's management and capacity gives me limited confidence that Kids Company will successfully implement the changes they describe in their new restructuring plans while meeting the stringent conditions set out in the proposed new grant.
"It is therefore my judgement that the proposed additional £3 million grant does not represent value for money, in terms of delivering the outcomes for which this department is funded by Parliament."
In their reply, Cabinet Office Ministers Oliver Letwin, the Chancellor of the Duchy of Lancaster, and Matthew Hancock noted Mr Heaton's concerns but added they were "very mindful of the inspirational work" Kids Company does.
They said they were confident the managerial changes at the charity "give it a realistic prospect of long-term viability so it can continue to deliver for vulnerable young people".
In a statement on its Facebook page, Kids Company said negative publicity will "impact our fundraising and cause irreparable damage".
It added: "Our collective focus should be the welfare of children who have placed their trust in Kids Company."