Top-performing grammar schools could merge with failing secondary modern schools nearby as part of the Government's £400m drive to raise standards.

Children's Secretary Ed Balls has said that areas with academically selective education systems contain many of the worst schools in England, undermining the chances of pupils from deprived backgrounds.

He said 638 schools where more than 70 per cent of teenagers fail to meet Government GCSE targets face closure or take-over by private firms, if they do not improve.

Speaking at the launch of the National Challenge initiative in London, Mr Balls said: "We have left the choice as to whether to continue with grammar schools to individual areas. But there are particular issues around attainment in secondary moderns and they face particular challenges.

"On average, secondary moderns have seven times more children on free school meals than grammar schools. Often when you talk to secondary modern heads, one of the first things you have to deal with on day one is a group of new entrants to school who think that the reason why they are there is because they failed."

He said he would encourage grammar schools to work more closely with secondary moderns that need extra help to improve under the National Challenge initiative.

This could involve grammar school headteachers working as advisers in secondary moderns and could even take the form of formal mergers or federations'.

"A number of the areas with the highest number of National Challenge schools are areas with selection - Kent, Birmingham, Lincolnshire," Mr Balls said. "So we will be looking to them for their plans and for the kind of pool of National Challenge advisers and heads.

"It may be that they will be other secondary moderns but it may well be grammar school heads. We would all be very encouraging of grammar school heads and governing bodies who want to play that role with other schools in their area. The evidence is it has a positive impact on both schools in the partnership. We will be encouraging that to happen in selective areas but it is really for local leadership to set the path."

The National Challenge initiative will also see an expansion of the controversial academies programme, with up to 313 of the privately-sponsored schools set to be open by 2010. Local authorities have been set a 50-day deadline to come up with a rescue plan for each of the schools on the Government's hit list. But teachers warned that the plan must not set out to name and shame' schools doing their best in tough areas.

Christine Blower, acting general secretary of the National Union of Teachers, said: "If Ed Balls is to provide meaningful support to the 638 secondary schools he has identified he has to lift the threat of school closure for failing to meet arbitrary targets.

"No headteacher or teacher mindful of their career will join a National Challenge school if they think it will be closed and turned into an academy in the following year."

Mary Bousted, general secretary of the Association of Teachers and Lecturers (ATL), said: "If the National Challenge does what it says on the tin - namely support these schools with increased resources, targeted assistance and, crucially, the brokering of local solutions between schools and local authorities - it has ATL's support.

"But if the National Challenge turns out to be more naming and shaming, a disgrace and failure of a policy, it will not improve school standards and the chances of the children in those schools."

The Government's target is for no state school to have fewer than 30 per cent of their pupils gaining five C grades in subjects including maths and English by 2011.

In 1997, there were more than 1,600 such schools and now there are 638 but some comprehensives will have to improve at double their current rate of progress if they are to meet the target.

Councils will be expected to draw up their plans for dealing with these failing schools by the end of this term. They could set up an academy, sponsored and run by a private business figure or church group, or a new super-trust' partnership with another school or university.

Shadow children's secretary Michael Gove said: "It is not just the 600 schools at the bottom which worry us. There are hundreds more schools where fewer than half the children get five good GCSEs which also need attention and the Government's proposal is too little, too late.

"Imposing yet more Government targets on struggling schools will do nothing to improve pupil achievement. They need to focus on discipline and behaviour and getting the basics right, particularly English, maths and the three sciences."

John Dunford, general secretary of the Association of School and College Leaders, welcomed the extra cash but added: "If the National Challenge is to be a success, it must make it an attractive prospect to lead and work in these schools, so they can attract the staff they need to raise achievement.

"This will not be helped by the threat of closure or academy status which will hang over many of these schools for the next three years.

"Research evidence does not indicate that such threatening policies are effective. The constantly increasing target for the number of academies is not helpful and will create turmoil where consistent, steady improvement is the proper aim of school leaders and governors."

The Government's Children's Plan sets out that by 2020 at least 90 per cent of children will achieve the equivalent of five higher level GCSEs by age 19.

National Challenge is an important step on the way towards this - to meet the goal that in every secondary school, at least 30 per cent of its pupils will achieve five good GCSEs including English and maths by 2011.

Ed Balls said: "Schools have made huge progress. In 1997, there were 1,610 schools where fewer than 30 per cent of pupils gained five good GCSEs including English and maths; today there are 638.

"Our goal over the next three years is to get every school to this minimum 30 per cent standard and to get that 638 down to zero. Every parent needs to know that their local school will get to this basic standard.

"GCSE success is not the only measure of how a school performs, but it is critical - teenagers need these qualifications to go on to further study, work and prosperity. A young person with five good GCSEs will almost always earn considerably more than a teenager who leaves school with no qualifications. Employers expect these qualifications as a minimum."