Improbable, a UK “unicorn” that once received the largest investment ever made in a European tech startup, faces a crisis after being blocked without warning from working with its largest partner.

The company’s core product, a cloud-based server system called SpatialOS, allows video game developers and others to build enormous virtual worlds that exist and operate independently of player action.

SpatialOS only works in a finished game when paired with a graphics engine capable of displaying those worlds on the computers, phones or games consoles of players.

On Thursday, the developers of one of the largest commercial engines, Unity3D, told Improbable that a change to the engine’s terms of service was intended to block SpatialOS, and all games created that use the technology – including those which had already shipped – from working with Unity.

“Unity has clarified to us that this change effectively makes it a breach of terms to operate or create existing SpatialOS and Unity games and in-development games, including production games,” Improbable said on its website.

The company added: “Unity has revoked our ability to continue working with the engine for breaching the newly changed terms of service in an unspecified way.

“Overnight, this is an action by Unity that has immediately done harm to projects across the industry, including those of extremely vulnerable or small-scale developers and damaged major projects in development over many years.

“Games that have been funded based on the promise of SpatialOS to deliver next-generation multiplayer are now endangered due to their choice of front-end engine. Live games are now in legal limbo.”

Improbable has insisted that the spat is not a threat to its business. “Unity is an amazing engine, and a lot of hobbyists and smaller games use it,” the company’s co-founder Herman Narula told the Guardian. He said that competing engines made by the Crytek and Fortnite developer Epic were more popular among larger developers. “Instead, the ones who will be hardest hit are the smallest and least able to survive it. It’s just not cricket.”

The key change in the terms of service appeared to be a new block from Unity on using its engine for cloud gaming services that do not have specific authorisation. Narula speculated that the change, and subsequent block was “probably either an accident or a negotiating tactic” on the part of Unity. “We’re waiting for someone in the west coast to wake up and make some ransom demands, basically.”

The Guardian contacted Unity for comment.

Some games developed using SpatialOS, such as the London-developed spaceflight MMO Lazarus, have decided to shut down their servers until the dispute is resolved.

“It’s going to be down for an undetermined amount of time, basically until the dispute is resolved, one way or another,” Lazarus’s developer, Spilt Milk, said in a tweet.

Others have been pushing to stay up until the situation has been made clear. Worlds Adrift, another British game with elements of Fortnite combined with World of Warcraft, would stay live for now, its developer Bossa Studios tweeted. “Whatever is happening in the background outside of our control, our focus is ensuring players are looked after,” it said.

Narula argued that the spat showed the danger of building a livelihood on a tech platform with unilateral power to change the rules.

He said: “What today’s incident shows is that a slip of a pen can upend the livelihood of thousands of people. All these services say at the end of their terms of service that they can amend these at will. My contract, my livelihood, is amendable at whim.

“Most people don’t abuse it. But I think it shows us a fundamental vulnerability.”

Improbable achieved global attention in 2017 when it received a $502m (£390m) investment from Japan’s SoftBank corporation, instantly valuing the startup, founded in 2012, at more than $1bn. Narula said at the time that the investment underscored Improbable’s core belief: that “the next major phase in computing will be the emergence of large-scale virtual worlds”.