The move would go a long way towards ending the annual row over whether or not councils pass on to schools the money ministers intend them to have.

I want to stress that we would be levelling up, not down

David Blunkett

But councils say many schools could end up worse off.

The idea is one of a range of options that will be in a government consultation document on the funding system, to be published later in the year.

These will be outlined by Mr Blunkett, when he addresses the National Association of Head Teachers' annual conference on Thursday morning.

He will say that the aim is to remove the worst of the disparities in the present system - under which schools get very different amounts to spend per pupil because they fall in different local education authority areas.

"I want to stress that we would be levelling up, not down," Mr Blunkett will say.

One option that he is "particularly keen to examine" is separating school and local education authority (LEA) budgets.

David Blunkett: Seeking to reduce worst disparities

He will portray the idea as a natural extension of Labour's "fair funding formula" for schools which gives heads greater control over some aspects of their budgets.

And it builds on the initiative announced in this year's Budget, when head teachers were given grants of up to �50,000 apiece to spend as they wished on things that would raise educational standards.

The 150 LEAs would get their own central government grants for the functions they carry out.

These include co-ordinating provision for pupils with learning difficulties, providing school transport, turning round failing schools and overseeing admissions.

Mr Blunkett will repeat that these would have to be carried out by an alternative structure even if LEAs were abolished, as some would like.

Grants would cover school transport

The proposals will "cut away the undergrowth" and ensure that the money is spent on teachers and teaching, Mr Blunkett is expected to say.

"Parents will see the benefits because schools will be better placed to spend money on their children's education."

Writing in The Times newspaper on Thursday, Mr Blunkett said that schools were already getting increasing control over their budgets.

Soon LEAs would be left with a "bare minimum" of school services for which they controlled funding.

He added that with separate school and LEA budgets "we can be much clearer about the funding intended for schools".

But the Local Government Association's education chairman, Graham Lane, thinks the idea is "daft".

He said councils spent �600m more a year on education than the government expected them to, funding the extra from local taxes.

He said that if schools' budgets were being controlled by the Treasury many would end up worse off and educational standards would suffer.

Crude funding formula

There would be bound to be a crude funding formula.

"There would be no way of meeting local needs in the way that we do now," he said.

But Mr Blunkett's message will go down well with head teachers at the conference.

On Wednesday, in a debate on funding, they denounced the irregularities in the present system and called for a national formula.

Mr Blunkett is also expected to propose a streamlining of the Standards Fund - which gives extra money to schools and LEAs which make successful bids.

Schools which do get the money would be able to carry it over from one financial year to the next, instead of the present "use it or lose it" system.

And he will guarantee that the documents his department sends to schools will be cut by one third in the next school year.