The Medway Queen took more than 7,000 trapped men from beaches in 1940.
Restoration work began last year with help from the Heritage Lottery Fund and the European Regional Development Fund.
The government said administrative errors had led to the suspension of EU funding and it was working to get payments released.
Restoration work on the ship's hull began in Bristol last April with money from a ??1.86m Heritage Lottery Grant.
Medway Council applied to the European Regional Development Fund for a grant to complete the restoration and bring the ship home.
The final stages of the project are being undertaken at a workshop in Gillingham by 16 people, including nine young apprentices whose jobs are now under threat, as there is only enough money until the end of April.
Peter Skinner, Labour MEP for the South East, said EU funding to all UK partners within the Interreg 2 Seas programme had been suspended after the UK government failed to meet the standards demanded by auditors.
He said the problems had nothing to do with the Medway Queen project.
"The Medway Queen has taken on local young people and is giving them practical work skills through apprenticeships.
"Through no fault of theirs funding has been suspended. That can't be right," Mr Skinner said.
"I've been pushing ministers; they need to find a solution. I have also demanded a meeting with the [European] commissioner. I want him on the case.
"The project is a great opportunity for the apprentices and they shouldn't be in danger of losing out because of some bureaucratic foul up."
In a statement, the Department for Communities and Local Government said: "This funding programme is run by a managing authority in Nord-Pas de Calais, France.
"Nevertheless, the department is very disappointed with the European Commission's decision to withhold payments to UK project partners and we are working intensively to get these payments released."

Cristian Montano was a constant threat, testing Magpies goalkeeper Scott Loach with an early shot, before bursting into the box to score before half-time.
Notts had gone close through Wes Atkinson and Izale McLeod, but Lee Brown got Rovers' second after the break when he fired in from 18 yards.
McLeod missed with a header as the hosts made a late fight-back.
The defeat comes days after chief executive Julian Winter left the club for Huddersfield, while angry home fans raised a banner in the Kop that was removed by stewards.
The restoration of a paddle steamer which rescued Allied troops during the Dunkirk evacuations is under threat after European funding was suspended.
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Bristol Rovers kept up their League Two promotion bid by consigning Notts County to a fifth game without victory.