Mr Blair has decided to over-rule the Chancellor, who lobbied strongly for John Reid, the Transport minister, to succeed Donald Dewar, who is standing down as Secretary of State after his election as First Minister of the Edinburgh Parliament.
The Prime Minister's decision is a setback for Mr Brown, who was also rebuffed in last summer's reshuffle when Nick Brown, a key ally, was moved from the pivotal position of Chief Whip to become Agriculture Minister.
MPs close to Mr Brown have criticised Ms Liddell's performance since she left his Treasury team last summer to become a Scottish Office minister with a brief to attack the Scottish National Party.
Mr Brown spearheaded Labour's campaign for last week's elections to the Scottish Parliament and installed some of his key aides at the party's Glasgow headquarters. Mr Blair's aides admit that the Chancellor "turned round" an ineffective operation.
But Mr Blair has kept faith with Ms Liddell, 48, who will become the sixth woman in the 21-strong Cabinet. Regarded as a tough operator, she worked as personnel director for Robert Maxwell's Daily Record newspaper before entering the Commons at the Monklands East by-election in 1994.
Ms Liddell will head a Scottish Office team which will be slimmed down following the transfer of much of its power to the Scottish Parliament. The number of ministers will be cut from seven to four because Mr Blair will not replace the three ministers who have become members of the new Parliament - Mr Dewar, Henry McLeish and Sam Galbraith.
Mr Blair has been impressed with the ministerial work of Mr Reid - MP for Hamilton North and Bellshill - and he may be given a cabinet seat in a wider reshuffle in July which will see the departure of Alun Michael, Secretary of State for Wales, following his appointment as First Secretary of the Welsh Assembly.
Mr Michael is expected to be succeeded by Paul Murphy, MP for Torfaen and a Minister of State at the Northern Ireland Office. Mo Mowlam, Secretary of State for Northern Ireland, is hoping for a promotion but Mr Blair is reluctant to move her unless the logjam in the Ulster peace process has been broken. Some of Mr Blair's advisers want Ms Mowlam to become Secretary of State for Health, and are urging him to persuade a reluctant Frank Dobson to stand down to become Labour's candidate for mayor of London.
Mr Blair will delay the announcement of a successor to Derek Fatchett, the Foreign Office minister who died on Sunday, until after his funeral today. A replacement is likely to be named on Monday.Reuse content