The Scottish Secretary, Michael Forsyth, also looked increasingly embattled after publicly pledging that he would fight to secure the contract for the Kvaerner Govan yard on the Clyde.
Mr Forsyth is also believed to have spent weeks trying to persuade the relevant Cabinet committees to give him at least part of the deal to take back to Scotland as a prize. He, Foreign Secretary Malcolm Rifkind and the President of the Board of Trade, Ian Lang, all have marginal seats in Scotland.
Mr Forsyth had visited the Kvaerner Govan yard to give it his support, but last night more than 1,000 jobs were under threat after the pounds 200m order for two Royal Navy tankers went to GEC Marine's VSEL yard instead.
Last night the shadow Scottish secretary, George Robertson, said the decision was a humiliation for Mr Forsyth. "This is a bitter blow for Kvaerner and the people of Govan," he said. "It is also a humiliation for Michael Forsyth who has lost yet another battle in the Cabinet.
"Kvaerner is a superb, high- efficiency yard which deserves better treatment than this."
Sigbjorn Ellingsen, the managing director of Kvaerner Govan, said the decision was a "severe blow". He warned that up to 1,000 jobs would be lost at the yard by the end of the year, leaving just a skeleton staff.
"Kvaerner Govan is working its hardest to win new contracts world-wide to meet both its short and long-term requirements - a task not helped by the strength of the pound," he said.
However, the Ministry of Defence said that the VSEL bid offered the "best value for money for the taxpayer".
The order will create a near- monopoly for the building of large warships in Britain, placing the MoD's competitive procurement policy in shipbuilding in some doubt.
GEC Marine has also been selected to build the navy's new Batch 2 Trafalgar class attack submarines, provided an acceptable price can be agreed.
The leader of the Scottish Liberal-Democrats, Jim Wallace, described the decision as "a slap in the face for the Scottish economy".
He added: "The decision by the Government to build two new tankers at GEC Marine rather than at Kvaerner Govan has thrown the future of the Govan yard plus 1,250 jobs into doubt. Once again it is a slap in the face for the Scottish economy. Michael Forsyth must tell us what advantage there has been on this occasion of him being Scotland's man in the Cabinet."
Mr Forsyth expressed his disappointment at the Govan yard's failure to win the contract and pledged his officials would discuss with the management what might be done to secure the yard's future.
But he added: "At the end of the day this is of course a matter for the MoD. They must ensure value for money to taxpayers."