An act of desperation, or of inspiration?

The Conservatives have been as astonished as the rest of the political world by the second resurrection of the Prince of Darkness last week, as they struggle to convince voters that the return of Peter Mandelson is another colossal mistake by Gordon Brown.

But they, above all others, should have sensed a change in the political weather two months ago, when shadow Chancellor George Osborne dined with Mr Mandelson in a quiet bay in Corfu.

Barely noticed by other diners in a noisy party of about 20 at Taverna Agni, the two men found themselves discussing the worsening economic climate and, inevitably, Labour's collapsing support in the opinion polls.

It is the widely held view that Mr Mandelson – who at the time was speaking to the Prime Minister back in Britain almost daily – indulged his dining companion by tearing into Mr Brown's personality flaws. Yet as the evening wore on, Mr Mandelson sounded more optimistic about the Prime Minister's prospects. Mr Osborne, like the rest of the political world, would have had no idea that his dining companion was to be parachuted back into the Cabinet.

Mr Mandelson's transformation from a foe who once happily claimed that Mr Brown's treasured economic record was "not all it is cracked up to be" into a key element of the Prime Minister's economic team has been months in the making.

The eventual return of Peter Mandelson to the Cabinet might have much to do with opportunism, but the most unlikely reunion of modern times was born out of political necessity – several months ago.

In October last year, Mr Mandelson and Mr Brown were barely on speaking terms as European leaders met in the Portuguese capital for the summit that would finalise the Lisbon Treaty. The trade commissioner had revealed that Mr Brown had not called him since becoming Prime Minister four months earlier. In December last year, Mr Mandelson publicly savaged Mr Brown for failing to sign the Lisbon Treaty on time, telling the BBC: "In politics you don't win an argument by putting yourself on the back foot." The comment infuriated Mr Brown's long-serving loyalists, who saw it as typical of the sort of "poison" Mr Mandelson would drip out occasionally.

By February this year, the cold war between the two men that had lasted since 1994 began to thaw. With the Tories stretching their lead over Labour into double figures, Mr Brown held 80 minutes of "pleasant" but businesslike private talks with Mr Mandelson during a visit to Brussels.

When Mr Brown was at his lowest ebb as Prime Minister, immediately after the catastrophic defeat in the Crewe and Nantwich by-election in May, the trade commissioner was one of the first people he went to for advice. The coterie of young advisers who had surrounded Mr Brown at the Treasury had helped to steer him into a series of disasters once he reached Downing Street.

The pair had lunch in Brussels in May, and at an EU summit in Brussels in June, Mr Brown surprised observers by defending his old foe for his "excellent work" after French president Nicolas Sarkozy blamed Mr Mandelson for contributing to the Irish rejection of the Lisbon treaty.

In an interview in July, Mr Mandelson praised the Prime Minister, saying he "gets globalisation" and adding, "He's providing strong leadership."

The rapprochement was helped by Shaun Woodward, the Northern Ireland Secretary and a friend of Mr Mandelson, becoming more trusted by the Prime Minister, who by spring this year was looking outside his warring circle of loyalists for ideas to improve Labour's prospects.

The tentative approach to Mr Mandelson – as well as his fellow Blairite spinner Alastair Campbell – for what Downing Street insiders describe as "mature, experienced strategic advice" – developed throughout the summer, to the point that they ended up speaking to the Prime Minister up to three times a week.

Reaching out to two men who epitomise the remnants of the Blairite ascendancy was at once recognition of the limitations of his advisers and an admission the Brown regime lacked the "big beasts" required by all governments in good times and in crisis.

The crisis the Prime Minister faced at the start of the summer was the uneven contest between a moribund government and a resurgent Conservative Party; the descent into global economic meltdown has made the unthinkable a political reality. Mr Campbell has been easing his way back into front-line politics in recent weeks, and now Mr Mandelson has surged ahead of him, back into the Government. The development has divided opinion within the party – but some of his former rivals are at least attempting to be positive.

"I cannot disagree with any of the criticisms about Peter's negative characteristics," conceded one of his long-term opponents. "But if you want to strengthen your economic team, it is obvious that you should make use of someone who has spent the past four years dealing with international trade issues at the highest level. He has not always made friends in Brussels, but it is widely acknowledged that he has been an effective trade commissioner and a courageous one in taking the decisions that were required of him."

It is an argument that faithfully reflects Mr Brown's central justification for his dramatic coup, the declaration that Britain requires "serious people for serious times".

Mr Mandelson, once described as "economically illiterate" over his support for the euro, leaves a mixed record in Brussels. But he can point to ministerial experience in this area – and the business community in the UK appears to agree that the new Business Secretary fits the bill. John Cridland, deputy director-general of the CBI, said: "The Department for Business must have a heavyweight political big hitter at the cabinet table, and we are encouraged that Peter Mandelson is returning to this role." Despite the political implications of his appointment, Mr Mandelson amounts to a sensible use of resources by the Prime Minister; there are no guarantees that his beefed-up economic team will steer Britain through the crisis, but it is hard to identify anyone more qualified for the job. If Britain emerges relatively unscathed, the most dangerous move of Mr Brown's career will have been a success.

The Conservatives, traditionally wary of his use of the "black arts" against them, are already struggling to produce a coherent approach to Mr Mandelson's return. However, as several inveterate Labour opponents were quick to point out yesterday, with Mr Mandelson it is impossible to ignore the political implications. Indeed, the circumstances of his appointment were surrounded by internal political chicanery.

The wheeze of accepting another Blairite back into the fold originally gathered pace as the Prime Minister attempted to stave off further rebellions within his Cabinet. After Alan Milburn and Stephen Byers were decisively rejected, Mr Mandelson received a telephone call from the Prime Minister at lunchtime on Thursday. While he quickly accepted the offer, he also imposed certain conditions on the move, including that Damian McBride be moved from briefing the press to long-term strategy.

Mr Brown faces an uncertain few months. But, with one of the key Blairite plotters lashed to him, his chances of surviving at least until the next general election are much improved. Tomorrow night, the Prime Minister will face the Parliamentary Labour Party at the start of the new session, in an appearance one apparatchik described as "more important than his conference speech". He will quickly realise the value of having Mr Mandelson behind him, rather than working away in the shadows, when the difficult questions begin.

Pros and cons: Peter Mandelson represents a double-edged weapon for the Government. Here's why...

Good idea

1 Two members of the best election-winning team Labour has ever had are back together.

2 The warring Brownite factions in Downing Street are neutralised.

3 It will frighten the Conservatives.

4 Mandelson has top-flight experience of dealing with the global economy.

5 Blairites might be won over by Brown's inclusiveness.

Bad idea

1 Mandelson has twice been forced out of the Cabinet.

2 He is seen by many MPs as divisive and poisonous.

3 He might not be able to prevent himself from knifing Brown if things get worse.

4 A hostile media will be out to uncover a scandal about him.

5 It will upset other members of the Cabinet.

Winners and losers in seismic shift of political landscape

As MPs return to Westminster tomorrow after the long summer break, they will find the political landscape not quite transformed but significantly altered by the earthquake of Peter Mandelson returning to British politics.

When Parliament rose in July, the Conservatives were more than 20 points ahead in the polls and the Prime Minister faced an increasing threat to his leadership from Foreign Secretary David Miliband, inset below. But a turbulent party conference season, against the backdrop of the global market crash, has changed fortunes, left factions, and forged unlikely alliances.

Gordon Brown faced open rebellion by a dozen Labour MPs three weeks ago, capping a terrible summer in which Mr Miliband wrote a 'Guardian' article calling for renewal. But the PM looks stronger today, as Labour has halved the Tory poll lead, and he delivered a well-received speech dismissing David Miliband, David Cameron and George Osborne as "novices".

Mr Brown shocked the political world by returning Mr Mandelson to Cabinet, a move described as "weak" by opponents. But he has created an economic council of war, to tackle day-to-day shocks to the financial system, which will be seen as an authoritative move. But doubts about his leadership remain among some members of the Cabinet.

David Miliband received glowing press profiles on the eve of conference. But his price crashed after a poorly delivered speech and being pictured holding a banana.

The return of Peter Mandelson could also see the Foreign Secretary squeezed out as the Cabinet's big Blairite hitter. The outgoing Trade Commissioner and new Business Secretary is suddenly one of the most powerful of ministers, with a seat on the war council and a likely role in writing Labour's manifesto.

Ed Miliband also becomes a major player. Already close to Mr Brown, he gave a highly rated speech to conference and his new role as Energy and Climate Change Secretary gives him an influential position in government policy.

Alistair Darling was attacked in August for warning that the economic crisis was the worst for 60 years. It seems he was right. But the creation of the economic war council, with its 18 members and twice-weekly meetings, means the Chancellor's power is weakened.

Jon Cruddas saw his popularity rise during conference. He turned down a number of ministerial jobs in the reshuffle, but the backbencher has a new role leading Labour's campaign against the BNP.

David Cameron was applauded for his statesmanlike performance at last week's Tory conference, in which he declared he was a "man with a plan, not a miracle cure". But critics said he shifted his position during the week, from attacking the PM over the economy to pledging bipartisan support. He is expected to carry out a mini-reshuffle this week to match the creation of the climate change department. His lieutenants have sounded rattled by Mr Mandelson's arrival, and the Tory leader must try to reinstate the 20-point poll lead before lack of confidence creeps in.

George Osborne was initially quiet three weeks ago when the global crash began with the Lehman Brothers collapse. He delivered a gritty speech warning the "cupboard is bare" and pledged new Tory rules which would keep debt in hand. His promise of a two-year council tax freeze pleased right-wing media but jarred with the realities of the financial crisis.

Nick Clegg saw his party jump by five points in the polls after the Liberal Democrat conference. But his pledge of income tax cuts sounded unrealistic.

Vince Cable's status was raised when he intervened early by calling on the Financial Services Authority to ban the short-selling of shares; a ban which the FSA then imposed.

Jane Merrick

Mandelson on Brown

"I know I haven't had the easiest of relationships with Gordon Brown over the last 10 years. Some of his supporters blame me for backing Tony Blair rather than Gordon." BBC interview nov 2004

"Gordon... you have a problem in not appearing to be the front-runner... You have to either escalate rapidly or you need to implement a strategy to exit with enhanced position, strength and respect." In a letter to Brown setting out his leadership chances may 1994

"I love you, but I can destroy you." Mandelson to Brown in transatlantic phone call 1994

"Within the party, or more strictly within the New Labour family, there has been a fissure really from the word go. And the reason for that is that Gordon thought that he could and should have been leader in 1994." On Blair's leadership victory sept 2006

"[Brown is doing] an exceptionally good job in what are very, very challenging conditions for our country." On joining Brown's Cabinet oct 2008

Brown on Mandelson

"We've been betrayed." Brown to a friend following receipt of the Mandelson letter may 1994

"Peter? He's been going around telling everyone that I'm gay. And I'm not gay." Brown rejecting Blair's appeal for an end to the feud (in Lord Levy's memoirs) 1995

"Peter asked me for 10p to phone a friend the other day. I said: 'Here, take 20p and ring them all.'" Brown in speech to Tribune rally 1996

"Who will silence Mandelson?" Brown's scribbled appeal on a pile of papers in his office, seen by Alastair Campbell may 2001

"I'm going to 'kill' Mandelson." Brown to a visitor to his constituency home (meaning he planned to neutralise his rival) 2002

"He has built up a reputation as someone who can get things done." Oct 2008

To have your say on this or any other issue visit www.independent.co.uk/IoSblogs

Interesting? Click here to explore further