Ministers have threatened to strip Sadiq Khan of control of London's transport network unless he agrees to hike council tax and fares and extend the congestion charge zone, in return for funding.
Grant Shapps, the Transport Secretary, hit the London mayor with a series of demands in return for a £4.9bn bailout from Westminster to rescue Transport for London (TfL).
Ministers could seize direct control of TL if Mr Khan, who is its chairman, refuses to slash costs, raise fares and launch a tax raid, Mr Shapps warned.
Mr Khan said he could not accept the Government's plan that would impose higher costs on Londoners and choke off the capital's economic recovery.
"It is clear that difficult choices lie ahead to plug the huge gap the pandemic left in TfL's finances. I have been ready to talk with Government about how the necessary funds can be raised – but a proposal which singles out Londoners for punishment is completely unacceptable, as well as making no economic sense," he said.
"I urge ministers to come back to the table with a revised proposal which does not punish Londoners for doing the right thing to tackle Covid-19 – and to publish their review into TfL's finances in full. I remain ready to talk."
TfL has pleaded for government help after passenger numbers collapsed due to coronavirus. Westminster handed Mr Khan £1.6bn in May to help the transport authority survive the following six months.
But with experts predicting it could be years before public transport use returns to pre-Covid levels, TfL has asked for almost £5bn to get through the 18 months.
Talks have been ongoing for weeks to break the deadlock as politicians in Westminster attempt to impose a slew of reforms on Mr Khan.
The stand-off continues as Boris Johnson also squares up for another row with local leader Greater Manchester mayor Andy Burnham, after the Government confirmed it would impose Tier 3 restrictions on the region on Friday. It has offered £60m for business and employment support.
Mr Shapps proposed the initial six-month deal in a letter to TfL, according to the Financial Times, which first reported the latest escalation of events. In a so-called “H2 deal” Mr Shapps raised the spectre of increasing fares at a higher rate than the rest of the nation's rail network.
The Labour mayor has overseen a fare freeze for four years. He agreed to a fare increase of RPI inflation plus 1pc in May - a level expected to be implemented across the railways nationally in January. But Mr Shapps said a steeper rise would be required.
Meanwhile, the congestion charging zone would need to be extended so that it covered the Ultra Low Emission Zone - broadening the area it imposes by 18 times. And the Transport Secretary said that Londoners would need to pay more for their public transport through a supplement to council tax.
Mr Shapps warned: “We will be taking reserve legislative powers allowing us if necessary to direct TfL... This would be combined with a further series of short-term funding settlements.”
A TfL spokesperson said: “We continue to discuss our immediate funding requirements with the government and hope these discussions can be concluded successfully soon, so we can help London through this next phase of the pandemic.
“We are doing what we can to minimise costs and aim to continue operating a full service across our network while our funding discussions continue.”
Separately, Mr Khan said the 10pm curfew should be “immediately scrapped” to help hospitality businesses adjust to new coronavirus restrictions. The Mayor of London said that allowing pubs and restaurants to stay open later would provide a financial boost, after Tier 2 restrictions banned households from mixing indoors in the capital.
The new measures, which came into force in London on Saturday, mean that pubs and restaurants can only serve groups of customers who live together and abide by the "rule of six".
Mr Khan said: "I have said for a while that the current curfew rule needs to be rapidly reviewed. We saw the worrying consequences of increased social mixing on the streets and on public transport in the capital around 10pm immediately after its introduction.”