The dispute threatens to sour relations with the Government after it had made peace with the force by backing down over three of the most controversial aspects of the Sheehy report on pay and conditions.
The Police Federation, representing 126,000 officers below the rank of superintendent, has privately warned Michael Howard of trouble ahead if the review leads to massive cuts in police numbers and semi-privatisation of jobs.
A fresh dispute would come as a serious blow to the Government. Mr Howard is about to go on to the offensive to recover the Tories' lost credibility on law and order with two major pieces of legislation - the Criminal Justice Bill in the Commons and the Police and Magistrates' Courts Bill in the Lords.
The Home Office confirmed that the internal review into police functions is taking place. A spokesman said: 'It is not Machiavellian.' But Lyn Williams, general secretary of the Police Federation, has estimated it could lead to a cut in numbers from more than 126,000 to 80,000 over the long term. His claim is denied by the Home Office.
Mr Williams, a former police officer, has told colleagues the review could pave the way for a European-style, multi-tiered force. It is to be carried out by senior Home Office officials, and is studying the scope for a switch of roles from police to 'civilians' in almost every duty area. A White Paper on the police, published in June, foreshadowed a wide expansion in the privatising of the role of the police, going beyond the use of non-police personnel for desk jobs, freeing officers for policing the streets.
The Home Office is keen to employ such people to carry out time-consuming tasks, including escorting slow-moving loads, monitoring traffic and helping with surveillance. The police fear that will open the way to more radical changes, leading to more private security guards being employed to protect property.
Mr Howard has refused to back vigilantes, but private security guards are believed to outnumber police. The use of private security has been growing on estates where crime is rife; there is a council-run scheme in Sedgefield, the North-east constituency of Tony Blair, Labour's law and order spokesman.
The review of police functions is seen by the federation as an exercise in cost-cutting under pressure from the Treasury, which identified the Home Office as one of four departments needing a fundamental budget reappraisal. The advantage for the Home Office is that non-police personnel can carry out tasks more cheaply and do not need lengthy training.
The prison service has been targeted for more privatisation by the Home Office. Savings on the police are likely to outweigh the risks, highlighted when Group 4, the private prison escort agency, let eight prisoners escape. Bringing more civilians into the force is estimated to have saved pounds 130m.
Tory MPs will accuse the federation of acting like a militant trade union. The federation, which gave a show of strength by holding a Wembley protest rally before the Government retreated on the Sheehy report, has appointed Mike O'Brien, Labour MP for Warwickshire North, as its second parliamentary adviser alongside Michael Shersby, a senior Tory backbencher.
The appointment, the first of a Labour MP since 1974, signalled the federation's determination to have a greater impact in Westminster, and confirmed its improved relations with Labour since Mr Blair took on the law and order brief.
More than 20,000 officers attended the rally to protest against Sheehy before Mr Howard announced that he had rejected proposals for performance-related pay; fixed-term contracts for lower ranks; and limiting full pension rights at 60 to officers who had served 40 years.
However, in addition to rumblings over the review of functions, the federation remains disgruntled about its annual pay deal. The Home Secretary accepted a Sheehy recommendation to abolish, from next September, housing allowances worth about pounds 3,000 for recruits.
The federation is demanding compensation, and believes the matter could go to arbitration. The focus for police unrest, its leaders say, could come in April when Mr Howard will have to accept or reject the arbitration findings.