The NHS could be up to £1.2bn in debt, double previous estimates, a healthcare thinktank warned today.
The number of NHS trusts that began the current financial year in debt was also higher than the 25% the Department of Health would do so, the King's Fund said.
The thinktank concluded that the health service was at risk of being trapped in an annual cycle of job and service cuts as debts mounted. It also said the government's market reforms of the NHS risked being derailed by the financial crisis.
The warning came as the health secretary, Patricia Hewitt, was due to address the Royal College of Nursing (RCN) conference in Bournemouth.
Ms Hewitt, who attracted ridicule earlier this week after claiming the health service had just enjoyed its "best ever" year, is expected to tell nurses that most of the 7,000 NHS job losses announced will come through "natural wastage", such as not replacing agency staff.
Delegates are expected to give her a frosty welcome similar to the one she received at the conference of the UK's largest public services union, Unison. The RCN predicted on Sunday that job losses would reach 13,000.
The King's Fund said the total projected gross debt for the health service in the past financial year ranged from £700m to £1.2bn, according to figures obtained from NHS trusts - almost twice the amount the government admitted.
The thinktank said hospital trusts accounted for 58% of the total projected deficit, with primary care trusts (PCTs), which run community based healthcare services, making up 37% and strategic health authorities, which oversee the work of local trusts, a further 5%.
A total of 61 hospitals (25%) and 69 PCTs (23%) have projected deficits, while only 29 hospitals (12%) and 35 PCTs (11%) have projected surpluses, according to the report, entitled Deficits in the NHS.
It said the government, trust boards, auditors and the heads of strategic health authorities must have been aware of underlying deficits plaguing trusts for several years.
The King's Fund's chief executive, Niall Dickson, said further cuts in services were "almost inevitable" as the pressure continued on trusts to meet government targets, such as those to reduce waiting times.
He added: "The priority now must be to sort out the financial mess in which the service is embroiled and to concentrate on a few key areas.
"This means tackling long-standing issues in some local services that should have been sorted years ago and getting a much tighter grip on costs and productivity.
"Trusts must avoid relying on short-term fixes, such as borrowing, as that will mask deeper financial problems. This will only prolong the cycle of job and service cuts that we are now starting to see.
"It's clear that these financial problems threaten to derail the government's reform agenda. Already, the NHS is likely to start this financial year with a debt approaching £1bn. A significant worry is that hospitals will be left with too little cash to fund policies that would directly improve patient care."
A spokesman for the Department of Health said: "We are taking decisive action to tackle overspends in the minority of trusts where they exist through the turnaround programme, which is no quick fix.
"Payment by results, where NHS organisations are paid for the work they actually do rather than based on a historic block payment, means that long-term, underlying causes of deficits are being addressed.
"None of the Audit Commission reports that have been undertaken into individual trusts' financial difficulties refer to payment by results as a direct cause of financial problems."
