The Government provoked an angry backlash from trade unions and Labour MPs by announcing that the private healthcare provider Bupa was to run the first of 20 new "express surgery centres".

Union leaders described the decision to use Bupa's Redwood Hospital in Redhill, Surrey, for non-urgent operations as a "declaration of war" which put their efforts to strike a peace deal with the Government over public-private partnerships (PPPs) "almost back to square one".

The hospital, which will start treating NHS patients in five months, will be used exclusively by the NHS in a year's time and will carry out 5,000 extra routine operations a year.

Ministers said the move would boost the capacity of the health service and was a logical development of the Government's "what works" strategy. But 80 Labour MPs signed a Commons motion tabled by Tony Lloyd, a former Foreign Office minister, challenging the Government's policy. It declared: "The experience of public servants and users ... best demonstrates that directly funded and managed public services with directly employed staff can deliver the improvements in service provision that the Government seeks."

Labour MPs warned that the deal would mean taxpayers' money contributing to Bupa profits. They said there could be a two-tier workforce at the Redwood Hospital after the Government insisted that NHS staff who were seconded there would receive NHS pay and conditions. Tam Dalyell, Labour MP for Linlithgow and father of the House, said it would "exacerbate ill-feeling in the NHS" if they were paid less than the Bupa employees they worked alongside.

The timing of the announcement by the Secretary of State for Health, Alan Milburn, was seen as deliberately provocative by the unions. It came on a day when 600 workers held a rally in Westminster to "celebrate" public services and lobbied Parliament.

John Edmonds, general secretary of the GMB general union, said: "This is a slap in the face for the health service unions at precisely the point we were moving forward on public service agreements. When will ministers realise that the co-operation of health service workers is more important in the delivery of quality health services than the co-operation of the private sector?"

John Monks, the TUC general secretary, said it was time to give the Government a "kick up the backside" about the contributions made by public-sector workers.

Dave Prentis, general secretary of Unison, told the rally: "Money desperately needed to improve our public services instead are siphoned off into private profits. And, yes, that does include Bupa."

The unions believed they had reduced the threat of private-sector involvement in the NHS last week when the Chancellor, Gordon Brown, said that increases in the health budget would be funded from general taxation.

Union officials claimed the move was evidence of a split over the NHS between Mr Brown and Mr Milburn – a charge dismissed as "nonsense" by the Government.

Downing Street denied the move marked a U-turn since Mr Brown issued his pre-Budget report. Officials declined to estimate Bupa's profit margin from yesterday's deal and insisted that the project had passed three tests: providing value for money, good quality care for patients and boosting capacity.

But there was further confusion over the Government's policy when senior Treasury officials appeared to cast doubt over Tony Blair's pledge to raise Britain's level of health spending to the European Union average by 2006. Giving evidence to the Commons Treasury Select Committee, they described the plan as an "ambition" rather than a target.

Michael Howard, the shadow Chancellor, said: "This is farcical. This adds to the contradictions and confusions over Labour's plans for health funding."