The Prime Minister was forced to support Mr Clarke but by issuing only a mild rebuke to Sir Nicholas Bonsor, minister of state at the Foreign Office, Mr Major failed to repair the damage to his Chancellor's authority and left him facing renewed attacks by Euro-sceptics at the Conservative Party annual conference in a fortnight.
Mr Major came out on the steps of Downing Street late last night to try to restore some unity to the Government, but civil war in the Tory party over Europe left some senior Tories in despair at the damage to their long-term electoral chances. "It's madness," one former Cabinet minister said.
The Prime Minister's office said Sir Nicholas had been mistaken in his attack on the Chancellor's views, but it stopped short of a full message of support for Mr Clarke.
Mr Major said the Government's policy on the single currency was "entirely clear" and that the reporting of Mr Clarke's views had misrepresented them.
He spoke to Mr Clarke by telephone yesterday when the Chancellor landed in Bermuda - where he is attending a finance conference - but subsequent statements from No 10 failed to answer reports that Mr Major is furious with Mr Clarke for holding out against a more Euro-sceptic policy, which ministers believe could trump Tony Blair's New Labour.
Later Mr Clarke told BBC's Newsnight: "I said nothing I haven't said countless times before. I gave the clearest exposition of government policy."
The Prime Minister's dither followed a clear-cut challenge from Paddy Ashdown at the Liberal Democrat conference in Brighton: "Stop undermining your Chancellor in private and come and back him in public."
The challenge was calculated to add to the difficulties of Mr Major, who is caught in the crossfire between Heathite "grandees" and the Thatcherite right. Mr Ashdown, who is the only leader with a positive line on the single currency, accused Mr Major of briefing against his own Chancellor.
Cabinet colleagues privately said it would be "disastrous" for the Government to lose the Chancellor. Michael Heseltine, the Deputy Prime Minister, lined up with Mr Clarke, warning Euro-sceptics that the option of entering a single currency would not be closed before the election.
But the signal from No 10 was double-edged, making it clear Mr Clarke must adhere in future to the line agreed. The No 10 spokesman said: "The Prime Minister has made it clear all ministers must adhere to the position agreed by the Cabinet. The Chancellor fully supports this policy and believes his views have been misinterpreted. The Minister of State gave his interview on the basis of press reports of the Chancellor's views and accepts that he was mistaken . . ."
It was intended as a clear signal to the Euro-sceptics to hold back from attacking Mr Clarke at the Tory conference, but it is unlikely to keep them at bay.
The back-stabbing against the Chancellor also involved Conservative Central Office. Senior Tory sources were behind reports that Mr Major was furious over Mr Clarke's claim at the weekend that it would be "pathetic" if Britain waited for other countries to launch a single currency before deciding whether to join.
Sir Nicholas, a Euro-sceptic, said. "I think he will be out of line with the view of the vast majority of the party and I think it is out of line with what the government policy has been as expressed before . . .
"I think the difference between Mr Clarke and some of us is that he thinks we can have a single European currency without having a federal Europe. We think, many of us in the party, that that would be an inevitable step down a road we don't want to advance down."
Two normally supportive Cabinet colleagues told The Independent that the row was the Chancellor's fault. "The trouble with Ken is that he is just too honest and speaks his mind," one said. Another said: "There are only two people out of the 55 million in this country who think we are going to join the single currency in the first wave - Ken Clarke and possibly Heseltine."
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