Scarborough and North East Yorkshire Healthcare trust is cutting 600 jobs as part of a plan to save£29m and put it in the running for foundation status by 2010.
At a board meeting on Tuesday, chief executive Iain McInnes revealed that unless the trust reduced costs, it may be subject to a section 19 report used by auditors to flag up contentious cases which would brand its deficits 'unlawful' and refer the matter to the secretary of state.
In a financial strategy report he said: 'A Section 19 report would be extremely damaging and may damage future independence and the viability of some services.'
The Audit Commission had already considered issuing a section 19 report after the trust failed to reduce its cumulative£21m debt by the end of March.
North Yorkshire and York primary care trust reduced commissioning levels by£3.6m this financial year and anticipates further reductions next year.
Around 400 posts will be cut by next April through redundancies, turnover and transfers to other providers. A further 200 jobs will be scrapped early in 2008-09.
In a press statement, Mr McInnes said: 'By taking difficult decisions now we protect long-term provision of high-quality NHS services.'