The government has failed to sufficiently assure senior judges that judicial independence will be guaranteed under the Ministry of Justice.
Eight weeks of talks between judges and ministers have broken down after judges revealed they had not been informed of plans to split the Home Office and were concerned about the implications.
Lord chief justice Lord Phillips said the two sides were "poles apart", with the government refusing judges' request for a "fundamental review" of the present constitutional position.
However, he denied judges and the government are approaching a constitutional crisis, describing it instead as a "constitutional problem".
But Lord Phillips said judges were close to pursuing their "nuclear option" - bypassing ministers to tell parliament the lord chancellor is not protecting the administration of justice, in breach of his statutory duty.
Lord Falconer has refused proposals for an independent inquiry, tasked to ensure courts will be protected under the new ministry.
The new ministry has responsibility for prisons, probation and court services. However, judges are concerned courts will be sidelined while the lord chancellor Lord Falconer focuses on prison overcrowding.
Judges have called for an arms length executive agency for courts and a ring-fenced budget.
Addressing the Commons constitutional affairs committee, Lord Phillips claimed the Ministry of Justice had been created "to clear the decks" to enable the home secretary to concentrate on terrorism.
Lord Falconer confirmed he had not been involved in the decision to split the Home Office, first learning of it in a Sunday newspaper.
Alan Beith, chairman of the committee, told Lord Falconer: "I have been in parliament for 34 years and I do not think I have seen such anger and concern on the part of the senior judiciary."
The Conservatives claimed the breakdown of relations between the government and judiciary revealed a serious problem.
Shadow constitutional affairs secretary Oliver Heald said: "This represents a very serious constitutional problem, and a situation which requires prime ministerial intervention, whether by Tony Blair or Gordon Brown."