The threat emerged in a speech by Howard Davies, deputy governor of the Bank, and was reiterated in the Bank's quarterly report on preparations for monetary union.
It is understood the Bank has begun detailed work on preparing a UK system which would be brought into action if France and Germany refused to back down over Target.
Experts believe a London-based rival could operate with much lower costs and attract settlement business for the new currency away from continental centres, bypassing Target.
With 500 banks, London has the critical mass needed to start a new service, and a rival UK system would be open to any continental bank to use.
The sensitivity of the issue arises because Target will be a vital part of the new monetary system to be operated by the European Central Bank. It will clear the largest payments in euros across national borders, linking national settlement systems.
But France and Germany have been pressing to prevent banks from countries that do not join the single currency from having full access to the new service. This has been fiercely resisted by the Bank of England.
The Bank is enthusiastic about Target because it will bring a big reduction in the risks of settlement between European countries by transferring very large sums of money instantly between banks, rather than allowing delays of several hours between the dispatch and receipt. This "real time" settlement eliminates the risk of a domino collapse if one bank fails to deliver.
Mr Davies said in a speech in London that "denying even-handed access to Target would negate one of the main purposes of the whole exercise, to reduce the risk inherent in systems in which banks are exposed to each other for a period of hours".
Banks would find ways around the restriction which would be more risky, so central banks across Europe would have scored an own goal, he said.
Last Friday, the Ecu Banking Association announced plans for a conventional rather than real-time euro settlement system, which it claimed could take 40 per cent of the market.
One possible option, said Mr Davies, would be for the UK to develop its own real-time settlement system for euros "to allow quick, efficient and safe euro payments within the UK which would not rely on access to intra-day credit from the euro area".
The key issue is that France and Germany want non-member countries settling through Target to be refused credit from the European Central Bank during the working day.
Short-term credit is essential to keeping a large settlement system working, and the Bank of England's alternative proposals would achieve this without asking for credit from the ECB.
One option would be to set up a separate real-time UK clearing system for euros but use continental branches of British banks, which would have access to Target, to provide credit when the system needed it.