Tony Blair last night signalled he has dropped his support for charging students top-up fees in the face of street protests and cabinet complaints that it might reinforce an elitist, two-tier structure for higher education.

The prime minister ran up the white flag on the most controversial option for raising extra funds for university education after Gordon Brown, David Blunkett and other senior ministers sided with more than 100 MPs from their own party who fear the issue was becoming Labour's poll tax.

Students are still likely to have to pay more for their university courses but this will now almost certainly be postponed until after they graduate. Mr Blair's comments in the Commons yesterday still leave the door open for requiring students who attend Oxbridge and other leading research universities to pay more than those at other institutions.

Ministers and officials have begun an intensive round of meetings this week and next to thrash out a final settlement.

Baited over cabinet splits by Iain Duncan Smith, Mr Blair said that the review of higher education funding, to be published in January, "won't mean that parents are having to pay upfront thousands of fees [sic] and it will allow people the chance to go to university, which this side of the house favours and you don't". With the Conservative leader claiming to have revealed "a humiliating and spectacular u-turn" after weeks of ministerial sniping, No 10 officials insisted voters would have to wait until the white paper is finalised in January to see how the government plans to proceed.

"The status quo is not an option. We do need to get more money into our university education system. It can either come from the taxpayer, it can come from the parent or the student," Mr Blair said. "If it comes from the taxpayer, however, that means the majority of people who pay their taxes but haven't been to university have to fund it better.

"If it comes from the parent, obviously the danger is if parents are forced to pay large amounts of money upfront, that could indeed deter people from university education. The alternative is the student, and yet we don't want students to get further into debt. So, it is a difficult problem."

Yesterday students marched through the rain in central London to protest against top-up fees. A Metropolitan police spokesman estimated that 5,000 people were taking part; the National Union of Students claimed 23,000.

William Straw, president of Oxford University students' union, and son of the foreign secretary, Jack Straw, said at yesterday's protest: "Students at Oxford feel very strongly that top-up fees would deter people from the lower socio-economic groups from applying. It is clear that students feel absolutely passionately about this and that is why there are so many of them here."

In the Guardian today Anthony Giddens, director of the London School of Economics, advocates an extended loan system and rejects the graduate tax and top-up fee options. "Top-up fees would deter many students from poor backgrounds from applying. They would also alienate many of the middle-class voters upon whose support Labour depends," Prof Giddens writes.

Alison Richard, the provost of Yale nominated by Cambridge's university council yesterday to be its next vice-chancellor, also warns in a Guardian interview today that any new funding system for higher education must protect working-class students.

"If you are going to aspire to and assert your excellence across a wide range of disciplines, and attract the brightest and best minds to the academic staff, and keep them here, and attract the brightest and best students, it's a very expensive undertaking ... [but] whatever the solution to that problem is, it cannot be at the expense of access," she said.

The education secretary, Charles Clarke, favours some form of graduate tax, where students pay a contribution towards their tuition once they leave university. With such a system, the prime minister is also keen to find a way to spare those who go on to take low paid public service jobs.

Guardian Unlimited ' Guardian Newspapers Limited 2001