Prof Colin Riordan, the chair of Universities Wales and vice-chancellor of Cardiff University, said the policy of paying the majority of Welsh students' tuition fees has to change.
He wants it replaced with a means tested grant to help poorer students.
The Welsh government said its tuition fee policy has been a "huge success".
Prof Riordan told BBC Wales' The Wales Report TV programme: "If you took the same approach to the tuition fee grant, as you do with maintenance grants, you could free up considerable funding to allow Welsh universities to compete in the same way as other universities in the UK and that's really critical to the future of our country.
"There is no limit to the number of students that can go to university which means there is no limit to the money that is needed to fund the tuition fee policy and that means there is not enough money to fund Welsh universities."
Yesterday, First Minister Carwyn Jones defended the Welsh government's university tuition fees subsidy and rejected the idea that tuition fee support should be limited to Welsh students who study at universities in Wales rather than anywhere they study in the UK.
He was responding to Plaid Cymru leader Leanne Wood who said the current policy meant too much Welsh public money ended up going to English universities.
On Sunday, outgoing Education Minister Huw Lewis told BBC Wales tuition fee grants would remain in place after May's assembly election if Labour retained power.
Universities in Wales get the majority of their funding through the tuition fees paid by students.
They also get an amount from the Higher Education Funding Council for Wales (HEFCW), around Â£90m a year, which has been cut this year by the Welsh government.
Prof Riordan said it had seen a 40% cut to funding which would result in job losses and would affect students.
"The critical part is that the government needs to make sure than enough money is still available to fund all the areas that the tuition fee grant can't fund and that means making sure that funding is available to ensure that Welsh universities can continue to be the great success they've been over recent years," he said.
"The future prosperity of the people of Wales is in the knowledge economy and the universities are the building blocks of that economy".
A Welsh government spokesperson said: "There is no doubt that we have had to make some tough decisions within this budget and we  recognise that the cut to HEFCW will present challenges.
"We stand by our tuition fee grant policy which has been a huge success, has supported our learners to study a course and at an institution that is right for them, and has meant that Welsh graduates have left university with debts that are on average Â£22,000 lower than graduates from England."
The Wales Report is on BBC1 Wales at 22:40 GMT
The Welsh government's tuition fee policy is threatening the future of higher education in Wales, according to the body representing its universities.