Speaking at an NDNA conference this week, its chief executive Purnima Tanuku said: "We all support the free entitlement for every child. But a free entitlement that isn't free to providers, as well as free to parents, is not sustainable."
She calls on the government to make financial support for nurseries the top priority for its early-years policy.
Tanuku said the government needs to ensure that any financial support needs to be long term and urged ministers to review how money is distributed at a local level.
She said: "Temporary top-ups aren't the whole answer. We need to tackle the fundamental issue of why the free entitlement is not covering the costs and most importantly how this is allocated at a local level."
The sector is already fragmenting into a two-tier system, with some nurseries pulling out of the free entitlement system as it costs them too much to provide, she added.
Tanuku called on delegates at the Essential Nursery Conference, taking place in Coventry, to lobby their local MPs to ensure early-years issues remain high on the political agenda.
She also used her speech at the conference to praise the work of nurseries in Cumbria, which are supporting parents and children affected by the recent shootings.
"We are also providing them with support and our thoughts are with the families and the community," she added.
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