The London Borough of Croydon has taken the rare step of issuing a section 114 notice, which prevents all non-essential spending in the face of a £66m deficit.
It said it could not meet the legal requirement to balance its budget this year.
Croydon is the first council to issue such a notice under the Local Government Finance Act 1988 since financially-stricken Northamptonshire did so in 2018.
A Croydon statement said the move was due to “severe ongoing financial challenges facing the authority”.
It came only two weeks after a severely critical report from auditor Grant Thornton, which said the council had a “collective corporate blindness” over its finances and business ventures.
Inessential spending will now be halted while an emergency budget is drawn up to find further savings.
Finance director Lisa Taylor said in a letter to councillors that serious issues facing the council included a potential budget shortfall for 2020-21 of around £66m.
The statement said: “Issuing the notice is recognition that despite all efforts to do so the council cannot now balance its budget this year, which it is required to do by law.”
Talks had started with the government about the financial support needed to balance the budget and the council would shortly issue an action plan to tackle the issues raised by Grant Thornton.
Ministers reacted to the s114 notice in Northamptonshire by holding an independent investigation and later sending in commissioners to run the county.
Hamida Ali, who became Croydon’s leader last month, said: “We need to be honest about the fact that, for a number of reasons, the council is on track to spend more than we have.
“The Covid-19 crisis and a decade of austerity have had a major impact on our finances but it’s clear the council has also made mistakes, and I am committed to fixing that.”
She said the s114 notice was “part of making that case” to government and warned “there will be difficult decisions ahead but I want to reassure local people that the council will still be here to support you”.