Dilemma

[expat]

Then explain to your current manager that you were given the impression that there was no renewal.
Tell him that you are signed up for a contract with an extension over the three months, and see if he will offer you a longer than three month contract.
If not, that's you out and no burned bridges.
Simply explain that in today's financial climate, you have to take the position with a longer prospect of work.

And remember that you are a contractor. When you work a contract to the end (and that's the date on the paper, not in your boss's current mental state), and then leave, you don't have to explain yourself. If you do, as a courtesy, then you are just telling them why, that's all. You are not entering into an argument about it, whereby if you fail to convince him, you have to stay with him.

[bullseye]

Update:

both the managers agreed for me to do a time share of 3 days for the second contract and 2 days for the first one.

Which means hopefully no bridges burnt.

Thanks once again for all the ideas.

[thunderlizard]

Nice one.
The next step is to bring in a sidekick and get both projects back to an average 5 man days a week. Quicker delivery for them, more cash for you: everybody wins.

[El_Diablo]

Update:

both the managers agreed for me to do a time share of 3 days for the second contract and 2 days for the second one.

Which means hopefully no bridges burnt.

Thanks once again for all the ideas.

Nice one.
The next step is to bring in a sidekick and get both projects back to an average 5 man days a week. Quicker delivery for them, more cash for you: everybody wins.

Worked out nicely for you, if you can do what TL suggests would be even better.