America's Ivy League universities have found themselves in a financial tangle after massive bets in the markets that once made them the envy of their peers turned spectacularly sour.

The elite colleges are being forced to cut costs, limit salaries, freeze staff hiring and delay major expansion projects, because the value of their multi-billion dollar endowments have plunged.

One by one, the leaders of these universities have announced austerity measures, and the capitulation of Harvard this week has put the spotlight on arch-rival Yale, which is so far holding out against the economic tide.

Yale says it will re-evaluate its budgets in the New Year to reflect the unfolding economic crisis.

Harvard, meanwhile, is considering halting campus expansion plans and delaying filling academic posts after admitting its endowment fund had lost $8bn in just the past four months, with more losses expected in the coming weeks. A fund that was $36.9bn in June could be down 30 per cent by the end of the financial year, its managers warned.

It has got tied up with investments in private equity, commodities and hedge funds, all of which it is finding hard to sell because of the chaos on Wall Street. The valuations of those it is able to offload have plummeted.

Many Ivy League university faculties rely on endowment income for half or more of their budget, and the losses threaten to erode their long-standing wealth advantage over institutions abroad. The problems come on top of a drop in donations from rich alumni, many of whom are feeling their own pinch from the credit crisis and the big drops in investment valuations the world over.

Drew Faust, president of Harvard, told its council of deans that there would have to be a "fundamental look" at the university's costs. "The prospect of significant endowment losses therefore has major implications for our budgets and planning, especially since our other principal revenue streams also stand to be challenged by the economic crisis," she said.

Harvard's shocking results eclipse anything in the modern history of the endowment. The previous worst year was 1974, when the fund lost 12.2 per cent of its value.

The difference is that Ivy League schools – led by Yale – have turned previously staid investment policies on their head in recent years, going in to more risky investments. During the boom years on Wall Street, this led to juicy returns. Yale's endowment, for example, swelled to $22.5bn after averaging gains of 18 per cent a year – more than anything ordinary investors were able to achieve in the stock market alone. The endowments hired some of the top fund managers from Wall Street to carry out their investing.

But the phenomenon has gone suddenly into reverse. The value of private equity holdings, for example, has typically halved, according to investment managers.

Since the autumn, a steady stream of colleges has announced budget cuts, some running particularly deep so that they can free up precious resources to attract middle class students, whose access to loans has dried up because of the credit crisis.

Earlier this week, Stanford said it would chop its $800m annual budget by $100m, and cut senior staff salaries by 10 per cent