An NHS hospital with an international reputation for medical excellence has been thrown into financial disarray by the government's health service reforms.

After overspending by about £900,000 in the first half of the year, Moorfields eye hospital in London got a risk alert from the regulator and had its borrowing limits halved. The hospital is recognised as one of the world's premier centres of ophthalmic expertise. Last week it opened a new children's complex, the largest in the world for paediatric eye care.

Moorfields was in the first wave of NHS trusts to gain independence from Whitehall when it was awarded foundation status in 2005. It is well connected. On February 23 the Queen will officially open the children's wing, to be known as the Richard Desmond Children's Eye Centre, after the owner of Express Newspapers, one of the funders of the investment. On February 28 the Prince of Wales will visit the "health city" in Dubai, where Moorfields is planning to set up an offshoot eye hospital to develop its corporate brand in the expanding Middle East healthcare market.

But the trust's connections could not protect it from a collapse in income. The foundation trusts regulator, Monitor, issued a financial warning in December, saying Moorfields was at risk of breaching its operating licence if it did not act quickly to restore stability. It halved the trust's borrowing limit to £12m and invited it to call in the consultants KPMG to help devise a recovery plan.

Ian Balmer, the trust's chief executive, said it was caught up in a financial maelstrom caused by deficits in other parts of the NHS. Under the government's payment by results system, hospitals are paid for each treatment according to a national tariff. Payment is made by the local primary care trusts, which commission care for patients in their areas. This year many PCTs are struggling to avoid going into deficit and are entitled to set restrictions on the speed at which hospitals work.

Moorfields was told by the PCT it would not pay for non-emergency treatment unless patients had been on the waiting list for at least 10 weeks. The hospital had been working on an average four weeks' waiting time, so the restriction caused an immediate loss of workload.

Mr Balmer said: "For a period we were operating at 12% below our surgical capacity. That meant our income dropped below the level planned."

The trust also lost £315,000 in August when the London strategic health authority cut allocations for training junior doctors.