PATIENT services may be hit at the Friarage Hospital in Northallerton because South Tees Hospitals NHS Trust has been ordered to make cuts of £66m over the next three years.

James Cook University Hospital in Middlesbrough and the recently re-opened Guisborough Maternity Hospital may also be affected.

More than 160 hospital jobs, including nursing posts, are set to be axed.

The trust, which employs more than 7,500 people and has an annual budget of £320m, has been steadily accumulating debt since it was bailed out by the regional NHS early last year.

At Tuesday's board meeting, a report from the Audit Commission warned that the trust must repay its debts or face the risk of failing to meet its statutory obligations as a public body.

Despite a strict cost-reduction programme and a recruitment freeze, the trust finished the last financial year £9m in debt. If steps are not taken, it will face a cumulative debt of £32m within a few years.

A savings plan would have regained £44m over the next three years, but the trust has been ordered to find an additional £22m in savings.

District Auditor Lynne Snowball took the unusual step of intervening to serve the trust with a public interest report.

This criticises the trust for putting its future at risk by allowing the situation to continue, saying: "The trust's failure to take effective action has allowed the situation to deteriorate, and the deficit to increase, to such an extent that financial recovery will now be much harder to achieve and sustain."

It also dismisses savings measures as inadequate, stating: "The trust's plan to continue the vacancy freeze will help to ensure that spending is controlled, but it may not provide recurrent savings in a targeted way and could impact on service delivery."

Simon Pleydell, chief executive of the trust, said: "We are not the only trust facing these kinds of issues. We will have to sit down with the Strategic Health Authority and the primary care trust to see how collectively we are going to manage this."

He said they would strive to avoid service cuts and make the savings through more effective care delivery. "We will try to re-deploy staff so that redundancy is a last recourse," he said.

The board meeting backed an interim savings plan which will cut up to 166 jobs, though 112 of the posts are either vacant or filled by temporary staff. The plan involves a review of Guisborough Maternity Hospital and microbiology services at the Friarage.

Liz Twist, regional head of health for the Unison trade union, said: "We are obviously concerned for the staff and about patient services. This is a hell of a lot of money to find and there is going to be some difficult decisions."

l Hambleton and Richmondshire Primary Care Trust has asked us to point out that national target figures for district hospitals to each see 30,000 accident and emergency patients and 4,000 births, referred to in last week's report of a public meeting at Hawes, came from the British Association of Emergency Medicine and not from the Government.

The association's report, The Way Ahead 2005, recognised that smaller hospitals in rural areas might not meet these figures, but that their A&E departments should be fully supported.