By Seonag MacKinnon
BBC Scotland Education Correspondent
Ministers are putting forward a plan to bracket universities with further education colleges to make a single upper education funding sector.
They would be collectively called Specified Tertiary Education Providers (Steps).
College and university leaders, who learned of the proposals on Thursday, were taken by surprise as they believed that the Scottish Executive was merely planning to merge the funding quangos for each sector.
However, the executive dismisses their claims saying that the plan amounts to no more than this.
Scotland's universities, which have a global reputation, are concerned that if the proposed restructuring goes ahead, they will lose their distinct identity and ability to attract research contracts and overseas students.
Further education faces a major shake-up
Universities Scotland, the representative body of the higher education sector in Scotland, has expressed "grave concern" about the proposals.
It hopes to meet with the First Minister Jack McConnell soon to discuss the matter.
Commenting on the consultation, convener of Universities Scotland, Professor Bill Stevely, said: "Potentially, this is damaging legislation and needs to be changed.
"Jack McConnell has done good work acting as an advocate of Scottish higher education around the world and we need him and his executive to make sure that that good work isn't undone by what is in this consultation.
"We have been worried about these proposals for some time. We have told the Scottish Executive this and our statement in the consultation paper makes it clear. The executive needs to listen to our real concerns."
Lifelong Learning Minister Jim Wallace, who announced the formal consultation on Friday afternoon, said the proposed restructuring did not mean merger of institutions.
He said: "The identity and legal status of our world class universities and colleges will not change.
"The new body will provide a more integrated view of the use of the public funds invested in lifelong learning, while guaranteeing maximum autonomy of individual institutions.
"The institutional status of Scottish universities and colleges will not change at all. It will enable a better strategic overview of the tertiary education sector. There are no plans to merge universities and colleges and to suggest so is irresponsible."
The proposed new system is designed to give the further education college sector, traditionally the Cinderella of Scottish education, greater status and encourage more people from poorer backgrounds to progress from a college qualification to university.
Colleges will also receive better funding to allow them to tackle crumbling buildings and introduce better facilities.
Under the single system, it would be easier for students to move up to university after gaining a college qualification.
They had expected simply to receive details of executive plans to merge the funding quangos for each sector.
Universities are not disputing the long-heralded plan to merge the two sectors' funding quangos.
But many principals are angry at the surprise extra proposal to bracket universities with colleges under the collective title Steps.
Dr Ian Johnston, principal of Glasgow Caledonian University, said he was concerned that the proposed restructuring would diminish his institution's distinctive characteristics.
He said he was opposed to the proposal to divide old and new universities in the new framework and added: "But we do object strongly to the Specified Tertiary Education Provider (Steps) idea, reintroducing the binary line - we simply can't believe ministers or officials mean that."
But there have been voices of support for the possible change. One was from Rami Okasha, president of the National Union of Students Scotland.
He said: "We think the great divide in Scottish education is between compulsory and non-compulsory education rather than between students who go to college and university.
"We want someone who is studying the same course in college to be treated the same way as someone in university."
Scotland's university system dates back to the early 15th century, when the University of St Andrews was founded, and has a worldwide reputation.
The plan to end centuries of tradition and excellence seems certain to meet with opposition.
There would be four grades of the new Steps institutions, with new universities graded below older ones.
Principals also fear that under the proposals they may lose some of their autonomy and be faced with greater competition from the private sector.