Britain was plunged into a fresh dispute with the Kremlin yesterday when Russia cancelled a blockbuster exhibition of paintings due to be held in London next month.

Spectacular pieces by Matisse, Van Gogh and Kandinsky are among more than 120 paintings that had been expected to go on show at the Royal Academy of Art on January 26. However, against a backdrop of deteriorating diplomatic relations, the Russian Government has blocked the export of the works temporarily, claiming that they could be seized to settle private legal claims despite assurances from ministers to the contrary.

A final decision will be made today, according to an official at the Federal Cultural Service on Culture and Cinematography in Moscow, which oversees export licences.

The outlook is bleak for the Royal Academy, which spent two years planning the show, invested heavily in publicity and was expecting at least £5 million from ticket receipts and merchandising. There is no contingency plan if the exhibition collapses.

From Russia: French and Russian Master Paintings 1870-1925 from Moscow and St Petersburg draws on work from Russia’s four principal state collections: the Pushkin Museum, the Tretyakov Gallery, the Hermitage Museum and the Russian Museum.

It had been seen as an encouraging example of cultural co-operation between Russia and Britain at a time when diplomatic relations are cooler than at any time since the Cold War.

Tensions have grown since Britain accused a former KGB officer of killing the emigré dissident Alexander Litvinenko in London last year. Both sides kicked out diplomats over the affair.

Last week the Kremlin expanded the dispute to the cultural sphere when it ordered the British Council to shut its offices in St Petersburg and Ekaterinburg by January 1. David Miliband, the Foreign Secretary, compared Russia’s conduct with that of Iran and Burma, the only two countries where the council is banned. In a posting on his blog at the weekend he also linked the move to the From Russia exhibition, contrasting Britain’s welcoming approach to Russian culture with the Kremlin’s action, which was “illegal, hurts Russians, and damages Russia’s image abroad”.

Vladimir Titov, Russia’s Deputy Foreign Minister, said there was no political motive behind the cancellation of the From Russia show. “The situation surrounding the organisation of a Russian exhibition in London has no relation to the British Council issue or any other political circumstances,” he told Interfax, the Russian news agency.

The exhibits in From Russia are sensitive because many were seized from private collections by the communists in 1917. Some have been the subject of legal claims by the collectors’ heirs, notably the descendants of Sergei Shchukin, a textile merchant in Tsarist Russia who became the greatest patron of Matisse. Russia has said before that it would no longer lend works to countries without anti-seizure laws after 55 paintings held by the Pushkin Museum were briefly impounded in 2005 while on loan in Switzerland.

Britain is one of the few European countries without an anti-seizure law although one is going through Parliament. “Letters of comfort” from Margaret Hodge, the Culture Minister, and James Purnell, the Culture, Media and Sport Secretary, have apparently failed to satisfy the Russians that the paintings will be safe here.

The Government has underwritten the collection to the value of nearly £900 million and emphasised that under English law, the artworks are recognised as Russian state property.

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