University College London has failed in its bid to take over Senate House Library amid fears that the move would "spell the end" of the federal University of London.
The library's financial difficulties came to a head in spring last year when the Higher Education Funding Council for England decided to withdraw its annual special funding of £1 million.
The library's 2008-09 budget showed a deficit of £1.4 million.
Three options were put on the table. One was UCL's bid to merge the collection with its own. The other two possibilities were to turn Senate House into a national arts, humanities and social science library under the leadership of the University of London's School of Advanced Study, or for a continuation of the status quo but with cost savings.
At a meeting on 13 May, the board of trustees of the University of London decided on the final option, which aims for the library to run without a deficit by 2012-13.
In a statement, the University of London said Senate House Library would continue "as a collectively owned and shared library resource", managed on behalf of the colleges by the federal university.
Running costs would be reduced through "staff, space and other savings".
There would also be a gradual move from print towards online and digital publications, and a new Library Strategic Planning Board would be established.
Paul Webley, director and principal of the School of Oriental and African Studies, and chair of the Senate House Library Review Steering Group, said: "This decision provides a vision for a low-cost, rationalised and modern University of London Research Library Service, consistent with the general shift across the library community from print to digital resources and from physical to electronic access.
"It recognises the library's ongoing value as a shared service that complements the college collections."
But in an email to staff, Malcolm Grant, president and provost of UCL, expressed his disappointment at the rejection of the UCL takeover, which he said would have achieved economies while opening the collection to all staff and students of the University of London and its member colleges.
"I still believe it is by far the most powerful vision, and the university's consultants confirmed that it could be the most cost-effective over time of all the options. Yet we were unsuccessful," Professor Grant said.
"Despite powerful support from the London School of Economics, heads of the smaller colleges were worried that this might spell the end of the federal university and were unwilling to support it."
In a statement, the Senate House branch of the University and College Union said it was pleased that the library would continue to be a collective federal resource but was concerned that the proposal to eliminate the deficit by 2012-13 could have "serious staffing implications".
Staff numbers in the library have already been reduced by 17.5 full-time equivalent posts.