Patients deemed to be a threat to themselves or others are being denied hospital beds while commissioners squabble over money.
The Mental Health Act Commission has found practitioners are being told to delay sectioning people with urgent mental health needs until primary care trusts ascertain who should pay for their treatment.
The problem is being blamed on high bed occupancy levels and the need for PCTs to balance budgets.
The Mental Health Act Commission claims that this has encouraged PCTs not to detain patients who have travelled from other areas until the home PCT has agreed to pay.
Commission senior policy analyst Mat Kinton said: "The problem happens almost anywhere but is fairly common in London.
"In the old days if a patient turned up needing to be detained, you'd just admit them and the funds would be sorted out later. But now people are being told they should have confirmation of funding before someone is put in hospital."
While patients await beds, they will be kept in custody by an approved social worker, put in a police cell, or "they could just be in the community”, Mr Kinton said.
He called for the Department of Health to clarify the issue in its revised Mental Health Act code of practice. Consultation on the code closed last week.
The commission’s biennial report Risks, Rights, Recovery, published yesterday, criticises the practice as "improper".
It says: "Some practitioners have been instructed that they are required to identify the commissioning authority, and get approval for the funding of a hospital place, prior to using the powers of the [Mental Health] Act to admit a patient to hospital."
It condemns the practice, saying no hospital admission "which by its very nature is a matter of necessity and is usually urgent" should be delayed "not only by the unavoidable need to search for an available bed but also by an avoidable requirement to ascertain its funding".
Mental health charity Rethink has also been alerted to the problem through calls to its helpline.
A spokeswoman said: "This isn't the first time we have heard of situations where clinicians have had to take resource pressures into account when making their decisions.
"It has even been suggested that clinicians have avoided sectioning individuals who need treatment because a suitable bed hasn't been available at the right time."
Primary Care Network director David Stout said it would be "bizarre" for commissioners to interfere with decisions over sectioning.
Cambridgeshire and Peterborough Mental Health Partnerships trust chief executive Karen Bell said that many admissions were made during the night and at weekends when commissioners were not available.
Michele Hampson, chair of the Royal College of Psychiatrists' general adult and community faculty, said reports that delays in being sectioned were "extremely worrying" because "detainment is the only safe option at that point".
She blamed the shortage of beds on ward closures sparked by the move to community treatments.
The commission's report reveals bed occupancy in 2006-07 improved slightly from the previous year but was still operating at over 100 per cent in more than a third of wards.
It also contains data suggesting there are a third more admissions under the act in NHS facilities annually than there are beds in the entire NHS mental health sector.
Nine per cent of acute beds for mental health and learning disability inpatients in 2006-07 were occupied by patients awaiting delayed discharges or transfers. There is less incentive for social services to tackle delayed discharge in mental health because penalties do not apply to the mental health or learning disability sectors, the report says.
Association of Directors of Social Services mental health lead Jenny Goodall said she "couldn't imagine" local authorities thinking like that. "Discharge is often a multi-agency responsibility, it's difficult to say who would be financially liable."
NHS Confederation mental health director Steve Shrubb denied bed shortages were a problem.