The National Day Nurseries Association (NDNA) business performance survey, in association with Nursery World and Pound Gates, has found that a quarter of nurseries were unable to say whether they would take part in the scheme in the future.
The report said that funding concerns raise questions over the Government's plans to expand free places for the most disadvantaged two-year-olds.
Comments from nurseries that took part in the survey suggest that the main reason for this uncertainty revolves around concerns about the sufficiency of the local authority funding in covering the costs of providing places, summed up by one nursery owner as, 'Not commercially viable to participate at current hourly rates available.'
Another said, 'Just can't afford to offer free places for two-year-olds and meet costs. Too many parents only want to use their free hours and ... we would have to close as (we) cannot make a profit and run a business without this income.'
Of those that are likely to get involved, the survey suggests their involvement would be limited to a small number of places for two-year-olds, with nurseries saying they would offer 11 places on average.
For more than four in ten nurseries offering places for two-year-olds, the funding received from the local authority does not cover their costs, the survey found.
Forty-one per cent of nurseries currently funded to offer the places said that the hourly rate did not cover costs. Nurseries receive an average of £4.89 per place, but the average shortfall per hour was £1.19, equivalent to a loss of £678 per year per child. This has risen from a loss of 77 pence per hour per two-year-old in November 2012.
Regionally, the highest funding shortfall was found in nurseries in London and the South East, with settings losing an average of £2.12 per hour per child.
For nurseries in this part of the country, the average hourly rate was £5.43, with half of these settings saying that the funding did not cover costs.
According to the survey, 66 per cent of nurseries said that they were funded to provide places for two-year-olds, with settings offering an average of nine places. The NDNA points out that the DfE's 2013-14 revenue allocations for the two-year-old places equates the average hourly rate for local authorities in England outside London and the South East as £4.90 per hour.
However, the survey found that nurseries outside these areas were receiving an average of 17 pence less than the Government's figure, at £4.73. Thirty-nine per cent of nurseries outside London and the South East said they were losing money on the places, with an average shortfall of 87 pence per hour.