Donald Dewar, Secretary of State for Scotland, warned George Robertson, the Defence Secretary, in the leaked letter that planned cuts in the Territorial Army could leave the country unprepared for major civil emergencies at a time when the millennium bug poses a potential threat to key services.
Ministers played down the threat of civil emergencies, and Downing Street was furious with Mr Dewar for using the millennium bug as leverage for more money to protect the TA in Scotland. The Prime Minister's spokesman denied any knowledge of contingency plans to bring in troops to cope with potential disasters.
The leak raised the seriousness of the threat facing the UK if computers regulating everything from traffic lights to air traffic control fail to cope with the double-zero at the change-over of the millennium.
The bug could also blow a hole in the Chancellor's optimistic forecasts for growth in the British economy, according to Gordon Brown's pre-Budget report. It says output will be hit by the 2000 changeover date.
"Some loss of output immediately following the date change seems likely," the report warns.
"Irrespective of how well preparations are proceeding in this country, the economy will remain vulnerable to disruptions in other economies."
However, the Treasury said because of the "wide margins of error, Year 2000 effects are excluded from the pre-Budget report forecast".
The report says the millennium bug poses "a significant global economic and governmental challenge", and outside estimates of the cost of dealing with it range from pounds 25bn to pounds 60bn over several years.
John Redwood, Tory trade and industry spokesman, said: "It shows that the Chancellor's figures for growth are a fantasy."
Mr Redwood last night challenged Peter Mandelson, Secretary of State for Trade and Industry, to give reassurances about safety. "The Government has assured us it is in control of the millennium bug problem. Fears are now growing that this is no longer the case."
The Government has set up a Year 2000 agency with a ministerial task force under Margaret Beckett, the Leader of the House, who will report to the Commons next month on the progress.
Tony Blair has made action on the millennium bug a government priority, and another body, Year 2000, was given the job of co-ordinating action in the private sector to deal with computer crashes. But there has been criticism that too little progress is being made.
Hospitals were told to pay for their own computer checks, and the Commons Public Accounts Committee, a spending watchdog, said earlier this year it was "appalled" at the delay in action in the health service where the failure of diagnostic and treatment services "could have serious consequences for patients".
In the leaked letter to the Secretary of State for Defence, Mr Dewar said: "The detailed proposals lead me to conclude that TA ability to respond and support local communities in the event of a major civil incident will be severely affected and indeed will all but disappear north of Inverness.
"This could well lay the Government open to criticism over a reduction of emergency preparedness at a time when millennium bug problems pose a potential threat to key services such as electricity and telecommunications and when, therefore, emergency preparedness should, if anything, be enhanced."
Alex Salmond, the SNP leader, claimed there was "open warfare" in the Cabinet over the cuts. "In his frustration at being bypassed by London, Donald Dewar appears now to have been forced into making the proposed Scottish TA cuts a resignation issue," he said.
But Helen Liddell, Mr Dewar's deputy at the Scottish Office, dismissed Mr Salmond's allegations as "hysterical hype" and said allegations that Mr Dewar may resign over the planned cuts were "preposterous".
She added: "Mr Dewar, in his role as the Scottish Secretary, is fighting the Scottish corner within the Cabinet like all departments do."Reuse content