At a time when there is a national shortage of primary school places the education secretary was accused of putting his own ideological beliefs above the needs of schools across the country.
The Basic Need budget is used by local authorities to expand primary schools or build new ones where there is a demand for places.
According to a Liberal Democrat source Mr Gove overruled the Liberal Democrat schools minister David Laws to take £400m from the Basic Need Budget for 2015-17.
Liberal Democrats claim that the cost of free schools has left an £800m 'black hole' in the Department for Education’s budget.
The Guardian reports that the education secretary has been warned by the chief secretary to the Treasury, Liberal Democrat Danny Alexander, to bring the budget for free schools 'back under control'.
An analysis by the same paper on Saturday showed that half of the primary free school places due to open in September remain unfilled.
This contrasts with reported shortages of 240,000 primary places across England, which critics suggests points to free schools opening in areas where there is no need for new places.
Speaking on BBC Radio 4's Today programme this morning Liberal Democrat president Tim Fallon said,'The evidence is that there are many parts of the country – south-west London, Liverpool and Durham from the top of my head – where there is particular pressure on school places and yet the money, the extra £400m coming from basic needs, is going instead to support free schools, some of which are not really meeting any demand at all for additional school places.'
On Friday the BBC revealed that private emails showed that Mr Gove had warned that £80m earmarked to offer free schools meals for all five- to seven-year-olds would affect the quality of teaching and learning.
Free school meals for all infant classes, due to start next term, was championed by Liberal Democrat leader Nick Clegg.
Meanwhile on Twitter shadow education secretary Tristram Hunt said that Gove’s raiding of the Basic Need budget was ‘an act of ideological vandalism’.
Labour also blamed the Liberal Democrats for giving free schools their ‘stamp of approval’.
Mr Hunt said, ‘They are culpable in the decision to re-allocate money away from areas where there are huge pressures on primary school places into the free school vanity project.
‘Ministers should report to the House of Commons explaining their decision to direct £400 million away from areas of high and severe need for new school places at a time when we have a national crisis in primary places.’
A spokesman for Michael Gove said, ‘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.
‘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 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.’
The spokesman did not deny that there was a shortfall of £800m.
Last week, a Public Accounts Committee report by a cross-party group of MPs found the financial management of some free schools as inadequate.