UNIVERSITIES are facing a financial crisis triggered by the faltering $15.5 billion market for international students, the loss of millions of dollars in investment income and the axing of a full-fee program for domestic students worth more than $116 million.

Andrew Norton, a Melbourne University adviser and research fellow at the Centre for Independent Studies, described the outlook for next year as a "perfect storm" generated by falling university revenues, rising costs and an 18-month wait for $5.7bn in extra funding from the Rudd government's education revolution.

"I think this is the single most difficult period in the last 20 years," Mr Norton said. "This could be the start of something big if the fears over the international student market are realised because there is no fall-back."

Universities Australia chief executive Glenn Withers said the sector applauded the government's commitment to improved funding for universities, but warned of a "precarious" 18 months before the extra money kicked in.

"A constellation of adverse conditions are actually ahead of universities," Mr Withers said. "The global financial crisis continues to affect investment revenues, depleting some universities' budgets. Full fees for domestic students have been abolished and some universities would argue that any government compensation has been insufficient to cover that loss.

"We are now waiting and watching to see what real effect the recent problems with private colleges and immigration will have on the international student demand for studying in Australian universities."

Kevin Rudd will meet Indian Foreign Minister S.M. Krishna this week to discuss New Delhi's concerns about attacks on Indian students, bankrupt colleges and claims of tertiary course rip-offs -- all of which have damaged the reputation of Australia's international education sector.

Mr Krishna arrives on Thursday for a five-day official visit that includes trips to Melbourne and Sydney for a first-hand look at the welfare of Indian students.

A spokesman for the Prime Minister said the meeting with Mr Krishna would include "talks on efforts by the Australian government to ensure the safety of Indian students and that they receive a good-quality, high-value education while they are in Australia".

Mr Withers said the promised restoration of a student amenities fee, which still hung in the balance in the Senate, was another problem for the higher education sector.

"If it is not restored, university budgets will be further squeezed," Mr Withers said. "In the short term, universities are out on a limb."

The financial crisis has already led to job losses at a number of campuses including the University of Melbourne, which last week announced 220 places would go as it sought to fill a $30m black hole.

Tension is also rising between university management and the National Tertiary Education Union, which is seeking wage rises of between 4 and 6 per cent, and between university heads themselves.

University of NSW vice-chancellor Fred Hilmer criticised his Sydney University counterpart Michael Spence for agreeing to what he described as an "off the wall" 17 per cent wage demand over three years.

"I would find it difficult to go cap in hand to the government when the reality is that extra money would go to wage rises that are outside community standards at this time," Professor Hilmer said.

Professor Spence, who is preparing a strategic plan for Sydney, declined to comment.

NTEU president Carolyn Allport said the union's pay demands were not excessive and had been ameliorated to take account of the tough times facing universities.

"I think we have been cautious ourselves," Ms Allport said.

Announcing its economic restructure plans, Melbourne revealed investment losses of $190m.

The global financial crisis wiped $150m from the University of Sydney's investments, $100m from the University of Western Australia's investment income, and $87m from the University of NSW.

Most universities expect some loss of revenue next year from the Indian student debacle and its ripple effect throughout the Asian region.

The financial impact is likely to be felt unevenly across the cash-strapped sector depending on each university's exposure to international student income.

About 20 per cent of the higher education sector's income is derived from overseas students, although that proportion rises to 53 per cent for Bond University, 52 per cent for the University of Central Queensland, 47 per cent for the University of Ballarat and 32 per cent for Macquarie University.

Macquarie vice-chancellor Steven Schwartz said: "After more than a year of pretending that we would be immune to the effects of the financial meltdown, reality is finally beginning to hit home. Although, even now, I am not sure that everyone involved in higher education realises how dramatically the landscape has changed. They soon will.

"Harvard is laying off staff, as are prestigious universities in the UK. The same thing is beginning to happen here. Investment income is down, domestic full-fees will soon be gone, overseas students are thinking twice and indexation of government grants is still years away. In the old showbiz term 'you ain't seen nothing yet'."

Australian Catholic University vice-chancellor Greg Craven warned that difficult times would expose weak universities, especially those heavily dependent on international students. That could put pressure on such weak universities to merge.

"There will be some universities where, if they tighten their belts, they may end up cutting themselves in half," he said. "For the last five years everyone has known that there have been vulnerable institutions out there, and that as long as good times remained they would be all right, but as times got challenging they would face series difficulties. I suspect what the current difficulties will do is simply make that extremely obvious."

Commenting on the planned job cuts at Melbourne, Education Minister Julia Gillard said: "Any jobs cuts are regrettable, but in these tough economic times the government is doing everything it can to reduce the impact of the downturn. Universities around the world, like all organisations, are coming to terms with what the changed financial circumstances mean and working to ensure they can continue to provide quality education for their students."

Additional reporting: Mark Dodd