He claimed it would have executive powers and would be drawn from representatives in Dublin and some future parliament in Northern Ireland.
Ulster Unionist MPs were outraged and there was criticism as well from politicians in the Republic. The all-Ireland body, according to Mr Reynolds, is among proposals in a new framework document which will form the basis of neogotiations once parties begin full negotiations on the province's future.
It is due to be published early next year, and is expected to be discussed when John Major meets the new Irish Premier, John Bruton, in London next week. The Ulster Unionist MP, Ken Maginnis, accused Mr Reynolds of "destructive dialogue" and seeking to weave a web of suspicion by giving the IRA the impression that an "embryo united Ireland" was within reach.
The Democratic Unionist Party leader, Reverend Ian Paisley, demanded a full explanation from Mr Major. He claimed the agreement was designed to edge Northern Ireland out of the UK: "Reynolds' comments, taken with all the other concessions so far handed out to Dublin, IRA/Sinn Fein and the SDLP, show that the Union is in the greatest possible danger."
Mr Reynolds, speaking on BBC Radio Ulster's Inside Politics programme, also said Government demands for the destruction of all guns before the start of negotiations with Sinn Fein could threaten the IRA ceasefire.
Substantive talks involving Republicans and British ministers should begin now and troops should be taken off the streets, he urged. He said Downing Street's precondition that weapons be handed in or destroyed could seriously threaten the ceasefire.
"The three months is up. Talks about talks will not find a solution. Everyone accepts that there has to be a destruction of weapons on both sides. It's unrealistic to set it down as a precondition," he said.
Civil servants and Sinn Fein will meet for more exploratory dialogue at Stormont tomorrow, when the issue of guns and explosives is likely to be raised once again.