Two organisations that distribute National Lottery cash to good causes are in merger talks to reduce costs, it was confirmed.

Under the proposed move the New Opportunities Fund would link up with the Community Fund to create one distributor.

The Community Fund supports charities and voluntary and community groups throughout the UK as well as agencies working abroad.

It was at the centre of a political storm earlier this year over a controversial £340,000 lottery grant to a group working with asylum seekers.

On its web site the National Coalition of Anti-Deportation Campaigns accused Home Secretary David Blunkett of "colluding with fascism".

In October the Community Fund announced the grant would go ahead but conditions would be attached.

The New Opportunities Fund provides lottery funding for education, health and environment projects across the UK.

There are a number of other bodies set up to distribute lottery money in other areas.

A joint statement issued by the Community Fund and New Opportunities Fund said: "The New Opportunities Fund and the Community Fund are progressing talks on a possible merger to create a new lottery distributor.

"The merger and creation of a new distributor is intended to lead to a reduction in the costs of lottery distribution and increased efficiency.

"The merger discussions arise from the Lottery Review. No decision has yet been taken. It is likely that decisions will be made by April 2003.

"We will be consulting the sectors affected should the merger go ahead."