Britain's oldest hospital had victory snatched from its grasp yesterday as it came towards the end of a four-year campaign to win government approval for a £1.15bn redevelopment plan - the largest private finance initiative scheme ever undertaken by the NHS.

Management consultants called in to resolve ministers' last-minute doubts about the need for extra cardiac and cancer treatment capacity gave full backing to the investment at Barts hospital in central London.

Matrix Research and Consultancy said the hospital and its sister establishment - the Royal London in Whitechapel - had to expand to meet the health needs of a growing population in east London and the Thames Gateway. The report reassured Patricia Hewitt, the health secretary, that she should not cancel the project for fear that it would generate a surplus of beds and operating theatres.

The outcome delighted supporters of the hospital, founded in 1123. Paul White, chief executive of Barts and the London NHS trust, said: "We have demonstrated that our hospitals are affordable, provide value for money and meet a desperate need ... The basis on which our financial case was built is reaffirmed."

But the Department of Health responded by raising a new obstacle to the contract being signed with the contractor Skanska Innisfree. "The aim must now be to identify the best way to deliver these services so they are affordable to the local NHS," a spokesman said.

It is understood that Ms Hewitt has a big task persuading the Treasury that NHS finances are stable enough to support annual repayments on big PFI deals. Under her plans, more patients will be treated outside hospital and those needing inpatient beds will be free to choose where to go, making hospitals' income less predictable.

Andrew Lansley, the shadow health secretary, said it would be folly for the government to back out of the deal at the last minute when contractors were already on site, increasing costs by £600,000 a day. "What is really going on is the Treasury is in a funk about PFI schemes worth £7bn to £9bn that are being proposed by the NHS."

Duncan Dymond, a consultant cardiologist at Barts, said: "The redevelopment was affordable. It could end up being unaffordable because the government is wasting time navel gazing. We should never be surprised at the politicians' ability to move the goalposts. The Department of Health gave Barts the green light in November. So why is the issue of affordability cropping up now?"

Skanska Innisfree was entitled to walk away from the Barts deal and claim compensation if contracts were not signed by yesterday.