Senior ministers dismissed calls by Demos, an independent think-tank with close links to Labour, for the monarchy to be stripped of its political powers such as choosing a prime minister, dissolving Parliament and giving the Royal Assent to legislation, which the report says should be transferred to the Speaker of the Commons.
The most radical suggestion by Demos is that the Prince of Wales should have to be confirmed as the next King in a referendum before he succeeds his mother. If he were rejected and the public also voted No to Prince William, then Parliament might have to draw up plans for a republic.
One cabinet source poured scorn on the referendum proposal, saying its prospects were "less than zero". Downing Street said: "The report has nothing to do with the Government and doesn't reflect government views."
Mr Blair has no intention of bringing in a wide-ranging Monarchy Act suggested by Demos. Ministers say any reforms will be piecemeal and driven largely by the Royal Family.
However, the Prime Minister will have to confront several potentially sensitive issues addressed in the report, "Modernising the Monarchy".
A 10-year deal on the civil list expires in 2001, and Gordon Brown, the Chancellor, looks certain to impose a much less generous financial settlement than the royals won under John Major. Their annual 7.5 per cent increase will be cut to about 2.5 per cent, in line with the inflation target. "They won't get more than the nurses," said a government source.
The Demos report, by Tim Hames and Mark Leonard, said plans for constitutional reform would draw the Queen into party politics. She might receive conflicting advice from the Prime Minister and the Scottish First Minister. If proportional representation produced hung parliaments, she would have to nominate the Prime Minister.
Some Labour MPs want reform of the monarchy to be higher up the Government's agenda. "There is a widespread feeling on the Labour back benches, and it's probably true for some ministers, that you cannot be seen as a modernising Government and somehow have the monarchy exempted," said Rhodri Morgan, chairman of the Commons Public Administration Committee.
The Demos report said there was "a perfectly rational case" for abolition of the monarchy, but an overwhelmingly powerful argument against - a large majority wanted to keep it.
Buckingham Palace said the proposals were " a useful contribution to the on-going debate" but any reforms were a matter for Parliament.