IT WAS in No 10 Downing Street, at the annual pre-budget consultation between the Prime Minister and his Chancellor, that the fateful decision was taken to go ahead with the doubling of VAT on domestic fuel. At the time - this was less than four w eeks ago - it was seen as unequivocal proof of the growing power of Kenneth Clarke.

The Conservative Party chairman, Jeremy Hanley, had lobbied to have the VAT increase scrapped, as had the Scottish Office, and they were given a sympathetic hearing by John Major. The tax on home heating was already unpopular, and it seems that Mr Major would have liked to avoid increasing it if possible.

At the crucial Downing Street meeting, however, Mr Clarke insisted that there could be no turning back and that potential rebels in the Tory party must be tackled head-on. According to one account, he simply dismissed the Prime Minister's reservations out of hand. One person close to these events spoke of authority ebbing down the corridor which connects No 10 to the Chancellor's residence at No 11.

Less than four weeks on, two rebellions later and with nine fewer Conservatives in the Commons, authority has certainly ebbed out of No 10. It has not, however, flowed in the direction of Mr Clarke. Both Mr Major and his Chancellor have suffered a dreadful humiliation and it may be that they have achieved a remarkable double whammy, with the former hastening his demise and the latter ruling himself out of the succession.

Although the Government's defeat last Tuesday night may have been over VAT, the issue that underlay it, as it has every other serious row in Mr Major's Conservative party, was Europe. The groundwork was laid a week earlier when the Bill to increase the European Union budget was made an issue of confidence. On that occasion, too, Mr Clarke was a prime mover, in alliance with Douglas Hurd, the Foreign Secretary.

The vote was carried, but nine Euro-rebels lost or resigned the Conservative whip in the process, and it was their decision to resist VAT on fuel which brought about the Government's defeat on Tuesday. And it is their implicit threat to form a party within a party which now raises the prospect that the administration will be unable to govern.

How did John Major, the leader who kept his party together through the general election and the Maastricht crisis, and who even papered over the cracks sufficiently to survive a European election campaign, contrive to bring about such a deep split at such a time?

EIGHT Conservatives, including well-known figures such as Teresa Gorman, MP for Billericay, and Sir Teddy Taylor, MP for Southend East, failed to back the Bill to increase contributions to the European Union and so lost the party whip. A ninth, Sir Richard Body (the man who puts Mr Major in mind of the "flapping of white coats") voted with the Government but resigned the whip in sympathy with his Euro-sceptic colleagues.

This is not an isolated group; they are the tip of an iceberg. Dedicated Euro-sceptics who did not rebel on that occasion include Bill Cash, MP for Stafford, Michael Spicer, a former minister, and James Cran, the unofficial whip of the rebels throughout the Maastricht campaign. And there are more: in all, 47 Tories demonstrated some sort of opposition to the Maastricht Bill through opposition or rebellion. Then there are the doubters in high places: Mrs Gorman has pointed out that four ministers are members of the Thatcherite No Turning Back Group: Michael Portillo, John Redwood and Peter Lilley in the Cabinet; and Michael Forsyth, a minister of state.

What distinguishes those willing to risk losing the whip from the rest? The new outcasts are mostly in their fifties or sixties and beyond the hope of ministerial preferment. With the exception of one, John Wilkinson, they enjoy the support of the party chairmen in their constituencies and can assume a relaxed approach to their position.

Take Christopher Gill, the tweed-suited MP for Ludlow who owns a Shropshire farm and describes himself as "financially independent". He said last week: "You can have far more influence as a backbencher without ambition than as a minister." His constituency has pledged that, should Conservative Central Office instruct it to reselect, it will do so "from a shortlist of one". He intends to be back after the next election but, should that not happen, "it would not be the end of the world".

This sort of attitude is bad enough for the Government, but worse still, the rebels are showing signs of cohesion and strategy. They have taken to meeting twice a week to formulate a common line. "This is the first sign of organisation," said a Tory insider. "It's dangerous." They showed their teeth last Tuesday in a spectacular ambush on Mr Clarke.

The Government whips had realised that the VAT vote would be close. They knew that they could not count on the support of the Ulster Unionists because energy prices are high in Northern Ireland, and hence the effect of VAT is greater. Six days before thedebacle, however, the whips were confident of a narrow victory.

That was Wednesday, 30 November, and in his oak-panelled room in the Commons, the Chancellor had his first one-to-one meeting with one potential rebel, Sir Andrew Bowden, who was campaigning for higher compensation for pensioners. Mr Clarke was not inclined to give ground.

As the days wore on and the whips began to worry, the Chancellor grew more generous. Just hours before the vote, Sir Andrew was among a succession of potential rebels who filed through the Chancellor's office. This time Mr Clarke was puffing on a large cigar, a drink poured, and wearing a broad smile. "Andrew," he said, "I can accommodate you."

It was not that meeting which decided the vote, but another. A little later in the evening, while both Labour and Tory whips worried about how they could ensure that they could get MPs back in time and good order from the Irish embassy Christmas party, the Tory outcasts gathered in a room off Westminster Hall.

Several of them had pledged in the past to back the VAT measure; now they decided whether to switch. Only one, Nicholas Budgen, would support the Government. When they broke up they made themselves scarce, keeping clear of the whips. A lesson of the campaign against the Maastricht Bill, this eliminated the risk of last-minute arm-twisting. So it was that, until the eleventh hour, the Chancellor, the Prime Minister and the Chief Whip remained in ignorance of their impending defeat.

THE rebels did not do it on their own, of course. Her Majesty's Opposition, too, had devoted some thought to the matter.

Labour's plan to table an amendment to the Budget Resolution, was spelt out in a press conference at Westminster on 21 November. Andrew Smith, the shadow chief secretary to the Treasury, circulated a text, observing: "I am sure that even as we meet some clever minds are being applied to trying to stop us proceeding with this amendment. We know the Government are as tricky as a sackload of ferrets, and I would put nothing past them to stop the Commons voting on this."

Then, on 30 November, Mr Smith wrote to 15 targeted Tory MPs, recalling their consistent opposition to VAT on fuel and inviting them to support the Labour amendment. Of those so approached, only three voted with the Government. Labour followed up the letter with intense pressure in the constituencies on wavering Tory MPs, singling out not just the prospective rebels but 50 of the most marginal Tory seats.

There were also secret telephone contacts with Tory back-benchers, and Gordon Brown knew that some of the names would come as a shock to Conservative whips. He was aware of the likely defection of David Sumberg, MP for Bury South, whose seat is vulnerable to a swing of little more than 1 per cent. By the end of last weekend, Mr Brown's shadow Treasury team were convinced that victory was in the air.

Labour is on a roll, and is determined to keep it that way. There will be further challenges to the Budget this week, and opinion poll evidence, suggesting the party will capture Dudley West from the Tories on Thursday with almost two-thirds of the vote,indicates that the Government does not have long to wait for its next disaster.

The defeat has focused attention on the Tory whips' office, and raised the prospect of political oblivion for the Chief Whip, Richard Ryder. As a Tory insider put it: ``Ryder has been there four years. That's an honourable stretch. It's a hard job. They need a scapegoat in this situation. Major may look for somebody else to do it, perhaps a minister of state.''

But it is not Mr Ryder who threatens the Government. The rebels' tactics graphically illustrated Mr Major's weakness. Without their support he leads what is in effect a minority administration. The Government might be able to struggle on, as Labour's minority administration did in the Seventies. There is little in the legislative programme to provoke dissent and Mr Major can, for the most part, rely on the support of the Unionists.

This can only be a temporary arrangement. As one Unionist put it: ``We can give Mr Major occasional help on constitutional issues but we cannot give him a blanket assurance of support. In Ulster, on socio-economic grounds, this Government is unpopular too. He can stagger on Callaghan-style for a few months, but if he wants something more than that he needs to mend fences with his Euro-sceptics."

The difficulty is that his party is deeply split on whether, or how soon, to bring them back to the fold. Among loyalists particular venom is directed at Nicholas Winterton and Tony Marlow. Mr Winterton, said one minister "is no more a Tory than Tony Blair - in fact probably rather less". So disloyal is Mr Marlow that he should, according to one leading Conservative, "become leader of the rebel group so that he can be the first to call for his own resignation". There is a strong feeling on the left of the party that the rebels must "do their porridge" before being allowed back, otherwise their disloyalty will, in effect, have been rewarded. No government, said one ex-whip, "could take them back without conditions".

But the right holds a very different view. One right-wing MP said: "Just observe how they're treated by their colleagues. No one is shunning them. I would rather expel Hurd, Heseltine and Clarke from the party; we could do without them."

Senior backbench figures such as Sir George Gardiner and David Evans have demanded their reinstatement by Christmas. Kenneth Baker, the former party chairman, described the removal of the whip as "crass stupidity". And to compound his difficulties, Mr Major could lose his majority on the standing committees of the Commons, which are made up in proportion to party strengths. A motion which could do this may be voted on this week and the rebels' votes could decide the issue.

The rebels have their own view on re-entry. Their first decision was they they would all go back into the Tory fold together, or not at all. The second was that they would extract a price for declaring their fealty to John Major. That price keeps going up. Initially, it was a referendum on the outcome of the 1996 inter-governmental conference on closer European integration. In recent days, the hard-liners have begun talking about a referendum before the IGC, designed to rule out a single currency, but also effectively tearing up the Maastricht treaty.

It is politically impossible for Mr Major to make concessions on this scale, but Tory whips are said to be sending out the message that if the nine MPs are ready to re-apply for the whip, they can return swiftly. The Prime Minister has hinted as much. "If he lets the rebels back in quickly, he loses face," one MP said. "But if they are left out there, perhaps he loses office."

THE strain of all this is beginning to tell among Tory MPs. Meetings of the 1922 committee are usually sedate affairs, but last Thursday's saw a fracas. Sir George Gardiner was lamenting the party's failure to communicate with the public when the Major loyalist Terry Dicks exploded and denounced him as a "two-faced sanctimonious hypocrite". As one ex-minister put it: "They are doing it at Cabinet level and at junior ministerial level, so they might as well do it in the barracks as well."

The party has become obsessed by its own ideological battles. A Whitehall source said: "I had not realised the extent to which the Conservatives have started to eat themselves. What is happening now is reminiscent of Nixon's America. I don't think you can pull it back from where they are now."

The task facing the Prime Minister is enormous. True, as one minister put it last week, he has "a spine of steel". True, also, that this is the latest in a long series of disasters and none of them has swept him away yet. But as another senior Tory put it last week, it does not follow that he can simply carry on indefinitely. "There is a calendar of events to consider, disasters waiting to happen: the Dudley by-election, the Scott report and the local elections next year."

Although it will be difficult to mount a challenge to Mr Major next November, just before a pre-election Budget, MPs in marginal constituencies are desperate enough to be considering it only weeks after they funked this year's chance. Mr Clarke, though still a formidable candidate, certainly lost ground last week. Tories are also smarting after his stiff measures last week. "Mini-budgets are rather like mini-bars," mused a senior back-bencher. "They are never as good as the real thing, and they always c ost more."

The expulsion of the rebels, the insistence on going ahead with doubling VAT on fuel and the mini-budget have all given the party a taste of Mr Clarke's macho leadership style. In any case, as a pro-European he is an unlikely leader of the parliamentary party as presently composed; his best prospects lie after the next election.

That, intriguingly, leaves the prospect of a Heseltine-Portillo partnership. One right-winger last week described such a ticket as "perfect"; Mr Heseltine's age would suggest that he would not remain in Downing Street for too long, and that would leave the way open in due course for the darling of the right.

The thought seems to have occurred to the President of the Board of Trade, to judge by the way he is playing his cards. One Tory remarked last week: "I was wondering, where is he? He was absolutely silent until suddenly up he popped on Thursday's Today programme mouthing words of the utmost loyalty."

The question remains whether the Conservative Party's famous instinct for power remains strong enough to overcome its determination to fight the internal battle over Europe to its conclusion. As one Heseltine supporter put it: "Michael is the rational choice, but that relies on people saying: `this is in our interests.' At present they seem more interested in settling old scores with each other."

What the `Conservative' press says The Times: ``The Prime Minister's position is now more vulnerable than it ever has been. Most Tory MPs have no great liking for Michael Heseltine, but if they judge that he will save more Conservative seats at the next election than Mr Major, they may we ll start to countenance a change of leadership, particularly if a top job were to be promised to Michael Portillo. The murmurings . . . will keep the Prime Minister awake at night for a while yet.''

The Daily Telegraph: "In all walks of life . . . boldness can expect to be praised only if it succeeds, and will be condemned if it fails. The threats and bluster of the past fortnight may not have caused great harm to the Government's economic policy, but in political terms they have been deeply damaging."

The Sun: "Taxes are going up, fares are going up, gas is going up. The only thing that's going down is people's opinion of the Government. And that can't sink much lower after the past week's debacles. The Tory party is split from stem to stern. The captain of the ship has lost his rudder. And now the mate [Mr Clarke] is steering us towards the rocks again."

The Daily Mail: "Although this paper shares the nationwide relief at being spared additional tax on the cost of keeping warm, we take no satisfaction from the profound humiliation inflicted on Mr Major's already shell-shocked Government. If, in less than48 hours, Mr Clarke can come up with a mini-package of measures to plug the £1bn hole in his revenue, why couldn't he have executed the same manoeuvre calmly in time for the Budget?"

The Daily Express: "Yes, it's serious. No, it is not terminal. Despite the VAT defeat, despite the backbench turbulence, the Government is not about to fall. It will stagger on. But for the moment, stagger is all it seems likely to do. The Government haslost its authority, ambushed by a motley crew of rebels."