The move risked inflaming a bitter feud in the Labour Party: Gordon Brown has never forgiven Mr Mandelson for backing Mr Blair for the Labour leadership when John Smith died in 1994. But Mr Blair hoped that putting the two men into the Government's top two economic posts would force them to bury the hatchet and work together again, as they had done until Mr Smith's death.
Yesterday cabinet ministers were wondering whether Mr Blair's gamble had backfired.Both the Mandelson and Brown camps suggested the other side was responsible for the leak of Mr Mandelson's pounds 373,000 loan from Geoffrey Robinson, the Treasury minister and one of Mr Brown's closest allies.
Initially, Mr Blair's reshuffle gamble seemed to pay off. The much-predicted turf war between the Treasury and the Department of Trade and Industry failed to materialise. Indeed, the Chancellor moved to draw a line under the events of 1994 by telling the Labour conference in October that he was not after Mr Blair's job. But the day-to-day pressures of government soon reopened old wounds. Mr Brown sought to spike Mr Mandelson's guns by announcing measures to boost Britain's competitiveness in his draft Budget in November, leaving the DTI little to announce in its much-trumpeted White Paper on the issue this month.
Then Treasury sources criticised Mr Mandelson's decision to abandon plans for a partial privatisation of the Post Office. They described his plans to boost its commercial freedom as "rubbish" and "garbage". Mr Mandelson prevented an all-out war by refusing to retaliate. He was puzzled by the criticism, since Mr Brown and he had agreed that a sell-off would be politically risky.
The language of the "Treasury sources" who criticised the Post Office decision meant that suspicion fell on Charlie Whelan, the Chancellor's press secretary.
But that was small beer compared with the revelation about Mr Mandelson's loan from Mr Robinson. In public, Mr Mandelson said yesterday he had "no idea" how the story emerged. In private, he told friends he believed he was the victim of a "classic sting" involving the Treasury and The Guardian newspaper, which broke the story.
Rumours reached the Secretary of State for Trade and Industry last Wednesday that a newspaper had got wind of his secret loan. Alarm bells rang louder when he read a story in The Guardian last Thursday saying he was "anxiously awaiting publication of a hostile biography by the Mirror journalist Paul Routledge" in the new year. Mr Mandelson feared the loan would be one of the book's main selling points.
On the same day, his private office at the DTI rang Alastair Campbell, the Downing Street press secretary, to alert him to the problem. Mr Campbell told Mr Blair, who was preparing to make a Commons statement on the air strikes against Iraq.
Mr Mandelson's ministerial red box, on which he worked at the now-infamous Notting Hill house at the weekend, contained another problem. David Heathcoat- Amory, the Shadow Chief Treasury Secretary, accused the DTI of dragging its feet over inquiries into Mr Robinson's finances.
Mr Mandelson planned to write back, saying the DTI officials were handling the matter thoroughly and, crucially, revealing that since September he had stood aside from the Robinson inquiry because he was a fellow minister and because of the loan.
First he consulted Mr Campbell, who counselled caution, suggesting that it would be better not to tell Mr Heathcoat-Amory about the loan.
"It is going to come out anyway," Mr Mandelson said.
"Why?" asked Mr Campbell.
"Because Charlie Whelan knows about it," said Mr Mandelson. "I don't think I have any option. I have done nothing wrong. I am not going to keep it private... It is on the verge of coming out."
The Guardian insisted that Mr Whelan was not the source of the information, and Mr Whelan told friends he was "furious" at the suggestion that he had leaked it. Mr Whelan's friends say it is "nonsense" to suggest he would want to damage Mr Robinson, a close ally. They suspect Mr Mandelson's allies may have had a hand in the story surfacing in The Guardian in an attempt to "draw the fire" from the Routledge biography - and spike Mr Routledge's guns.
One Whelan associate recalled a pre-emptive strike in The Guardian, written by one of the three journalists who revealed the house loan, before Mr Routledge published a biography of the Chancellor a year ago. This detailed Mr Brown's continuing bitterness at losing out to Mr Blair for the Labour leadership and his feeling that Mr Mandelson had betrayed him. Yesterday Mr Mandelson admitted he had "no idea" how the latest story had emerged.
But Malcolm Bruce, Treasury spokesman for the Liberal Democrats, said: "Some people will wonder whether this leak was inspired by the Treasury, who are thought to have been `at war' with Mr Mandelson for some time. If any of the Chancellor's aides were to be behind this leak, that would be a serious matter suggesting that the Government's two main economic ministers cannot work together."
Mr Mandelson, who was "outed" as a homosexual by Matthew Parris, the gay former Tory MP, on BBC TV's Newsnight programme in October, is also bracing himself for further trouble next month. Friends say he fears Mr Routledge's biography will be "a huge muck- raking smear" containing allegations about his personal as well as his political life.Reuse content