PUBLIC transport in London could be hit by a funding shortfall of £1.7billion by 2018 because of the recession, a report warns.

The London Assembly (LA) said the gap could mean higher fares and reduced services.

It also said a fare freeze planned for next year could see “spiralling” income loss.

But Transport for London (TfL) claimed the LA's figures were inaccurate and it would "closely monitor the economic outlook".

The funding problems will see Mayor Boris Johnson and TfL faced with a "difficult decision", according to the LA's budget and performance committee.

Possible options would include cutting services, postponing or cancelling improvements and raising fares at a rate “significantly” above inflation.

It may also be necessary to find more efficiency savings in addition to the £2.5billion already needed.

Committee chairman John Biggs said: "Finding ways to plug the gap that do not impact on services or place a large financial burden on fare payers will be difficult.

"The mayor is not required to consult with Londoners about the fares, but we feel it is essential that he does so.”

The Rail Maritime and Transport (RMT) union claimed the funding gap could skyrocket to £6bn and said it could "wreck" modernisation schedules.

It also said plans for the 2012 Olympics could be under threat, as well as the possibility of thousands of jobs losses.

The mayor's transport advisor Kulveer Ranger said: "The mayor has made his commitment to ensuring that fares remain fair and affordable very clear."

He added: "But it is unrealistic to predict that the economic climate will remain stationary until 2018. Therefore it is inappropriate to propose options based on that assumption."

TfL managing director of finance Steve Allen said a £112million "shortfall" highlighted in the LA report has been dealt with in its budget for 2009-10.

Mr Allen added TfL “do not recognise” the range of numbers of the LA report.

He said: "We continue to seek further savings and efficiencies over and above the £2.4bn we are already delivering.

"However, lower RPI (Retail Price Index) means that we also benefit from some lower costs.”