Buttercups Nursery, at the University Hospital of North Staffordshire in Stoke-on-Trent, will shut in January. The hospital Executive says it can no longer afford its £225,000 annual subsidy.
The closure of the 40-year-old nursery affects 65 children and leaves 22 staff without jobs.
Parents of children at the nursery were given until 10 November to come up with alternative funding solutions. The board considered their proposals, along with continuing to operate the nursery at a loss until April 2012, but decided neither would be financially sustainable.
In a letter to parents and staff, deputy chief executive Chris Calkin said, 'It is with great sadness and regret that I confirm the decision is to close Buttercups Nursery.
'For many years the Trust has subsidised the nursery, but the introduction of a revised NHS pay scale over the last five years has increased the level of subsidy to an unsustainable amount. This, combined with the increased pressures on funding available in North Staffordshire's health economy for high quality clinical services, has led the Trust to make a number of difficult decisions.'
Nursery staff are to be re-deployed elsewhere in the hospital, possibly in administration departments, once the nursery closes.
Marg Randles, operations director for nursery group Busy Bees, which operates 13 nurseries on hospital sites, said the chain is not concerned about its settings as only two are subsidised by NHS Trusts.
Tops Day Nurseries operates five hospital nurseries, one of which it took over from the NHS Trust. Managing director Cheryl Hadland said that at the time, it had to spend more on staff wages than the nursery made on fees, as most employees were on NHS salaries and pensions.