The cut in funding is being described by some principals as an oversight in what seems to be an initiative essentially aimed at boosting schools' sports funding throughout the country.
Prime Minister John Key launched Kiwisport, which will result in schools receiving $45 million in direct sports funding during the next four years.
An additional $37 million will be placed in New Zealand's 17 regional sports trusts, including Sport Otago, to which schools can make applications for further funding.
The regional money will also be contestable by sport clubs and community groups.
"Kiwisport delivers on the Government's promise to put money directly into the frontline to help more New Zealand children participate in organised sport," Mr Key said.
But Otago's rural area schools will receive less funding than is provided through the existing Sportfit programme.
Sportfit funding ends with this school year, when Kiwisport funding will start.
Funding through Kiwisport is allocated on the number of pupils at schools, and aims to cut paperwork by direct grants from the Ministry of Education.
But rural principals are angry they will have to apply for contestable funding to maintain the level of sports funding within their schools, particularly as a high percentage of pupils in rural areas play sport.
East Otago High School principal Rick Geerlofs said staff had "better things to do" than apply for funding which the school "should have anyway".
"I'm devastated and very frustrated . . . sport is a part of our school culture.
It struck me that maybe the people making these decisions are not thinking about the implications those decisions have on rural schools," he said.
Mr Geerlofs said Palmerston, like many rural schools, also had to factor in travelling distances and associated costs for sports teams.
Maniototo Area School principal Peter Heron said sport was "incredibly important" to rural pupils, with many going on to become sporting professionals.
"Maniototo Area School has a proud sporting tradition, with alumni including three past and present All Blacks, a Commonwealth gold medallist and eight of the 10 members of New Zealand's curling team.
"On a pro rata basis, having only 186 pupils, we are one of the most successful sports schools in the country," he said.
Mr Heron said the funding cut was made worse because the reduced amount had to cover all school pupils, whereas the existing funding was specifically allocated to pupils in years 9 to 13.
"We therefore have $1800 less for four times as many pupils," he said.
Otago Secondary Schools Association regional sports director Des Smith said he hoped rural schools would have some priority in receiving additional funding through Sport Otago.
Mr Smith, who is also on the board of the New Zealand Secondary School Sport Council, said it was "early days" for Kiwisport, and those involved would work out how regional funding could be best allocated.
"We are hoping the schools that are disadvantaged through direct funding will be able to get funding through Sport Otago, so what they end up with is at least equivalent to what they receive now," he said.
Mr Smith said overall the Government was allocating more money to school sport through Kiwisport.
• Otago secondary school sport funding cuts
Maniototo Area School (Ranfurly), 186 pupils, funding cut from $4542 to $2729 ($1813 loss).
Blue Mountain College (Tapanui), 230 pupils, funding cut from $4500 to $4000 ($500 loss).
East Otago High School (Palmerston), 190 pupils, funding cut from $4600 to $2800 ($1800 loss).
Lawrence Area School, 135 pupils, funding cut from $3587 to $1965 ($1622 loss).
Roxburgh Area School, 165 pupils, funding cut from $5500 to $2400 ($3100 loss).
Catlins Area School (Owaka), 159 pupils, funding cut from $4541 to $2432 ($2109 loss).
