Five positions will be lost at the art school, while remaining staff would be asked to teach across disciplines.
Other cutbacks would mean the closing of community learning centres at Wanaka and Alexandra, with the loss of two staff.
Polytechnic chief executive Phil Ker confirmed the details yesterday, after learning earlier this year the polytechnic was losing about 10% of its Tertiary Education Commission funding.
He said it was also possible students could be turned away in future and further changes could not be ruled out.
"I can't really say there will be no more cuts at this stage.
"The situation is exceedingly frustrating. These cuts make no sense in the current context."
Contacted last night, the academic leader of the art school's textiles department, Christine Keller, said staff first learned of the planned cuts four weeks ago but would have to wait another four to six weeks before details were confirmed.
Staff were "frustrated" and "exhausted" by the uncertainty and she feared the reputation of the institution could be eroded.
"We feel highly frustrated right now. Many of us are pretty sure this is the best art school in the country, and it's the oldest in the country.
"The people who remain will still try to run the school at excellence, but there will be limits.
"The big danger is it's a downward spiral," she said.
Dunedin curator, historian and writer Peter Entwisle said the school, which was founded in 1870, was the most renowned of the Otago Polytechnic's institutions, having helped shape painters of the quality of Frances Hodgkins, Colin McCahon and Ralph Hotere.
"These are the three outstanding names in New Zealand art. It's a pity there isn't a bit more support for the school," he said.
"The Otago Polytechnic has nothing of the stature of the School of Art - nothing at all."
Mr Ker said the polytechnic had gone through a "long process" of deciding where to make cuts, including an analysis of revenue and expenditure for each programme area, and consultation with staff.
The School of Art was regarded as the only remaining fully applied and discipline-based art school in the country.
It would continue to deliver the same number of disciplines, Mr Ker said.
Five positions would be cut and remaining staff would be required to teach across disciplines, requiring multiskilled artists.
"Government funding is so tight that we can no longer afford to cross-subsidise programmes that do not pay their way. And art education is expensive to provide.
"As you would expect, this is devastating for the staff . . . affected by this."
Mr Ker said if "realistic" funding was not forthcoming from the Government, he hoped the private sector might "step up".
As well as the immediate cuts, some prospective students could be turned away from the second semester of next year, so the institution did not breach the cap on student numbers.
The community learning centres to be closed in Wanaka and Alexandra taught courses in computing, business administration and management.
They employed one staff member each.
