Scotland's international standing as a university hub will also be hit, MSPs on Holyrood's Education Committee were told.
Alastair Sim, director of Universities Scotland, said he was "very, very concerned" over the announcement last week by Mark Batho, chief executive of the Scottish Funding Council, that the sector could be facing a 16% cut next year.
"That would lead straight to the sort of circumstances of significant job losses, significant loss of provision, significant loss of quality and, frankly, a bizarre situation where Scotland, potentially along with England, would be retreating from investment in higher education," Mr Sim said.
He pointed to countries such as the US, France and Germany which have invested in higher education as a "core part" of economic recovery.
Universities and colleges had a budget of about 1.7 billion from the Government last year and a 16% fall would cut about 250 million from the total.
Mr Sim said the recent public spending cuts announced by the UK Government left him worried about the impact on funding for the sector in the forthcoming Scottish Budget.
He added: "If we don't see as good an outcome as possible in a tight Budget Bill, that does bring serious risks with it of loss of provision, loss of quality of the student experience, loss of our standing as an internationally-competitive research and development hub."
Linda McTavish, convenor of Scotland's Colleges Principals' Convention, also warned of a dire impact if the 16% cut is approved.
"There's going to be colleges across Scotland that will fail," she told MSPs. "It's just too big a cut, and that's what's been in the public domain."
She also warned that colleges need to know before April what the Budget position will be in 2011/12.
"We cannot deal with students in a responsible manner because they've already applied to us from January," she said.
"We need to know what it is early doors because otherwise it would just be absolutely catastrophic in terms of long-term good."
Universities Scotland last week warned that some kind of graduate contribution is needed in the longer term to address university funding issues.
Mr Sim said: "We think that urgent work needs to be done to work from what we hope are generally agreeable principles to the definition of a workable scheme for Scotland."
He told MSPs that contribution should only start after graduation to avoid discouraging students from poorer backgrounds while highest earners should make a "higher level".
Liam Burns, president of NUS Scotland, said the body was due to vote on the issue on Saturday but it was talking about "compromising its position" on progressive taxation.
Universities in England currently charge students tuition fees and the cap is set to be increased which will allow them to charge 6,000, with a higher tier of 9,000 - nearly treble existing levels - if they promote access for poorer students.