Oxford's Nuffield Orthopaedic Centre has lost its bid to become a foundation hospital, with the blame being pinned on a new Government funding system for the NHS.

NOC chairman Joanna Foster and chief executive Ed Macalister-Smith, pictured in April The hospital, in Windmill Road, Headington, is the only one of 23 applicants so far to be refused flagship status and must re-apply from scratch in 18 months.

While NHS managers at the hospital are disappointed with the result, which is a culmination of 18 months' work, protesters who campaigned against the bid were delighted.

NOC chief executive Ed Macalister-Smith said: "We're obviously very disappointed. We always knew there were some challenges and we knew we wouldn't have an easy ride, and this is nothing to do with our competence."

Foundation hospitals have more freedom from Whitehall control, and are overseen by a group of members made up of public, patients, staff and other organisations.

Although they do not receive extra Government money, they are allowed to raise private funds to increase their annual budget.

Foundation hospitals independent regulator William Moyes today announced that he had given 10 NHS trusts the all-clear for foundation status, joining the 10 authorised to start in April.

Calderdale and Huddersfield NHS Trust and King's College Hospital in London had their applications deferred, while the NOC's bid was rejected because its five-year financial plan was "not sustainable or viable".

Mr Macalister-Smith explained that the final year of the plan was based on the 'Pay-By-Result' finance scheme being introduced into the NHS, where hospitals are paid for the work they do at a nationally set tariff.

He said: "At the moment this tariff is very crude because it averages lots of procedures together. We do lots of routine work, but 30 per cent of our work is specialist and complex -- much of which would be paid for at routine rates.

"The Department of Health understands this is a problem, and has no intention of letting a hospital like ours fall over, and is reviewing the tariff so it adequately reimburses complex and specialist work.

"But that won't happen for a few months, and the independent regulator says they don't know how that will help us at the moment, so has refused our application."

The system would mean, for example, that the hospital's world-renowned bone infection unit would only receive an £8,000 knee replacement fee for £25,000 of care given to a patient admitted with an infection following a knee replacement at another hospital.

John Lister, spokesman for the anti-foundation hospital group Health Emergency, said: "I hope the NOC learns a lesson, that instead of spending time ploughing their own furrow they should work with other people."