The warning came in response to a House of Commons Public Accounts Committee report which criticised a number of departments for hesitating to end problematic PFI contracts for fear of counter-claims by contractors.
A statement by the Treasury to MPs said, "Where private sector providers do not meet their contractual responsibilities and all reasonable attempts have been made by all parties to resolve the situation, the government will be prepared to terminate such contracts in accordance with its legal rights, even if this means a loss to the financial participants in the scheme."
In July the government pulled the plug on the use of PFI funding for IT outsourcing contracts after a string of high-profile disasters.
Troubled PFI projects include Libra, the effort to link IT systems in magistrates courts, which cost nearly three times more than expected and never delivered its core software; and Pathway, the £800m project to automate post offices and provide a swipe-card system to pay welfare benefits.
The Public Accounts Committee said, "Departments need to make contractors aware that termination is a very real threat. They should not always regard it as the most difficult and risky option."
The Treasury's threat would apply to "a small proportion" of deals but it stressed the importance of ensuring that contractors realised that in extreme circumstances termination was an option.
The government is to examine what additional steps are needed to prevent "excessive termination costs" and has told departments to make sure that arrangements are in place to ensure continuity where contracts are terminated.