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UK Sport and Sport England are to be merged as part of the Government’s cost-cutting drive, it has been announced.

The two bodies both distribute National Lottery money to sport – UK Sport funds elite Olympic athletes and promising sports stars, while Sport England funds grassroots sports in terms of facilities and coaching but only in England rather than across the whole of the UK.

The merger would see the organisations based as separate divisions under one roof with a single chairman and board.

But UK Sport chief Baroness Sue Campbell has warned that it risks disrupting preparations for the London 2012 Olympics.

She said: "This goes further than we had previously expected. What is crucial now is that all sides engaged in this decision understand not only the issues but also the risks involved in such a move.

"We will as always play our part in seeking the best solution for sport and seeking to make the delivery system as efficient as possible.

"But equally we are very aware not only of the existing effectiveness of our operation but the incredible strides we have taken in high performance sport over the past decade, and the significant progress made in developing a system that is not only delivering results like those seen in Beijing but also making the UK the envy of the sporting world.

"With London 2012 on the horizon, it is vital that we continue to build on this and don't distract preparations for home nation success in two years' time."

Culture secretary Jeremy Hunt announced the move, saying the merger would "create a more effective structure to deliver elite sport success and a wider sports legacy from the 2012 Games".

But the biggest issue remains how to combine a body that affects the whole of the UK with one which only covers England. Scotland, Wales and Northern Ireland have similar funding bodies to Sport England and these would almost certainly be retained as individual organisations.

A spokesman for the Department for Culture, Media and Sport added: "Where proposed changes have implications for the devolved administrations in Scotland, Wales and Northern Ireland, we will work closely with them to finalise proposals."

Richard Lewis, Sport England's chairman, argued it was too early to say what the changes will mean.

"We are clear that any solution must be one which benefits sport as a whole, particularly as we approach the milestone of two years to go until the London Olympic and Paralympic Games,” he said.

"We hope that discussions over summer with the Government, UK Sport and other home country Sports Councils will look at how best to maximise the combined expertise and efficiency of our organisations, while ensuring that our preparations to make the 2012 Games a real success for this country are not disrupted in any way."