The coalition government has descended into open war on education as senior Liberal Democrats said Michael Gove had raided £400m from a fund that guarantees school places for pupils in order to plug a massive financial "black hole" in his free schools programme.

In a dramatic escalation of tensions, the Lib Dems confirmed highly damaging leaked information from a senior government source, who said that Gove had secretly taken the money from the Basic Need fund for local authorities last December, in the face of stiff opposition from the Lib Dem schools minister David Laws.

The Basic Need budget is given to local authorities to ensure that they can provide sufficient school places for all children in their area and it is crucial when there is heavy pressure on pupil numbers.

The government source behind the revelations tore into Gove, describing him as a "zealot … so ideologically obsessed with his free school experiment [that] he's willing to see children struggle to get suitable school places". This was done, said the source, because Gove had let the free school budget spin "out of control".

Last month this newspaper revealed a secret plan to focus support on failing free schools because of the "political ramifications of any more free schools being judged inadequate".

The Lib Dems said the leaked information from the heart of government was accurate and the secretary of state had pressed ahead in order to try to fill an £800m projected "black hole" in spending on free schools between 2013 and 2016.

A spokesman for Gove did not deny that the Basic Need budget had been raided, but said that the free schools budget was "demand-led". He claimed that providing more money for free schools allowed more places to be created, although the public accounts committee recently reported that a quarter of free schools opened by September 2012 had 20% fewer pupils than planned.

The spokesman added: "The suggestion we are cutting money for new places in areas of need to pay for free schools where they are not needed is totally wrong. These claims pretend that money spent in free schools is not creating new places in areas of need. That is simply not true."

The revelation will take strained relations between the Conservatives and Nick Clegg – a close ally and friend of Laws – to breaking point: there were blazing rows last week over coalition policy on free school meals and on knife crime.

According to the coalition insider, the £400m would be enough to fund 30,000 new school places, and would do much to ease pressure in areas where parents struggle to find places. It is understood that Gove tried to make up the remaining shortfall by using a further £400m underspent from other departmental budgets.

Laws is said to have been strongly against the move because the raid reduced the Basic Need budget for 2015-2017 from £2.75bn to £2.35bn.

The coalition source added: "Everybody knows there's real pressure on school places at the moment and the secretary of state knows better than most. It is nothing short of lunacy to slash the amount of money available for new school places to lavish on free schools. The Conservatives are putting the needs of a handful of their pet projects ahead of the requirements of the other 24,000 schools in the country.

"Michael Gove is so dogmatic about free schools, he essentially places no spending restrictions on them at all. The free schools budget is out of control and the secretary of state would rather sink another £800m into the black hole, rather than rein in spending."

Shadow education secretary Tristram Hunt said the Lib Dems could not run away from blame: "The Free School programme had the Lib Dem stamp of approval from day one. They're as much to blame for the failings as the Tories. Gove's decision to transfer this funding away from areas in need of new primary places into the Free School programme is an act of ideological vandalism."

A number of free schools, which can be set up by parents and others outside the supervision of local authorities, have been given the lowest ranking by Ofsted in recent months, raising concerns about the programme's future.

This month's damning report on The Hawthorne's free school in Liverpool means twice as many free schools have been given Ofsted's "inadequate" rating as other state schools. Analysis by the Times Educational Supplement has shown that 11% of free schools were inadequate, compared with 6% of all state schools, although a higher proportion of free schools – 15% – were also judged outstanding. Overall, 45 Ofsted reports on free schools have been published, of which seven were outstanding, 23 good, 10 required improvement and five inadequate.So far 174 free schools have been opened, with a further 116 in the pipeline. Ministers have earmarked £1.5bn for the free schools project by March 2015 – and £1.1bn has already been spent. An £800m deficit would be huge for a government trying to rein in spending. Among the schools judged as "requiring improvement" in recent months (the second lowest Ofsted ranking) is Greenwich free school, whose co-founder is Jonathan Simons, the head of education at Michael Gove's favourite thinktank, Policy Exchange.

Bedford free school, previously praised by Gove as "academically ambitious", was also found to require improvement earlier this year. Ofsted insiders said they feared the reporting of more failing free schools would follow in the weeks and months to come.

The spokesman for Gove added: "From 2015, funding to councils for new school places will rise by more than £200m a year. On top of this, investment in free schools will provide tens of thousands of new places in areas of need.

"Indeed the vast majority of free schools - more than seven in 10 - are in areas with a shortage of places. This investment in free schools is entirely in addition to the rising basic need funding for councils which we announced in December.

"Free schools are hugely popular with parents and are more likely to receive top ratings from Ofsted than council-run schools. So it is absolutely right that, where they are needed, new places are created in free schools."