Balls stirs Cabinet tensions

Gordon Brown's closest political ally has warned David Miliband it would be "crazy, destructive and divisive" of him to try to oust the Prime Minister amid new signs of cabinet tensions.

Ed Balls, the Schools Secretary, sought to bolster Mr Brown's position as speculation resurfaced that he could be forced out of Downing Street within weeks after the Government made a shaky start to the new political season.

Chancellor Alistair Darling's gloomy forecast at the weekend that the economic problems were "arguably the worst" for 60 years has overshadowed Mr Brown's attempt to launch a political fightback by unveiling measures to help people through the downturn. Although Mr Brown will strike a more upbeat note, the City reacted badly to Mr Darling's words and speculation about tension between Downing Street and the Treasury.

The pound slumped to a record low against the euro since the launch of the single currency in 1999, falling to 81.39p, as City analysts said the Chancellor's remarks suggested the Government knew the economy was in a worse state than it had previously admitted.

Mr Balls tried to calm City jitters and squash reports that Mr Brown might sack Mr Darling in an imminent reshuffle, saying the Chancellor should stay at the Treasury and insisting he did not want his job. "I have no reason to believe there is any prospect in any change of Chancellor," he told ITV News. "I think it would be the wrong thing to do."

But Mr Balls raised eyebrows by spelling out the consequences of a cabinet coup against the Prime Minister. Asked about Mr Miliband's decision to stake his claim as a future Labour leader in July, he told Channel 4 News: "I've known him for very many years and I know he is a sensible, rational, sane politician and a good guy ... I don't think he would ever do anything so crazy, destructive and divisive and that is why I am totally confident that is not what he was doing." Some MPs interpreted that as a "Mafia-style warning".

Today, Mr Brown will try to go on to the offensive by unveiling a £1bn package of measures to help first-time buyers, prevent repossessions when people run into trouble with mortgage payments, and speed up the building of social housing by councils and housing associations.

It will include a new mortgage rescue scheme, under which homeowners could sell their properties to a council or association and rent them back; "shared ownership", under which authorities or associations buy a share in the property; and "shared equity" in which they would provide a loan to reduce the householder's mortgage payments. A new "HomeBuy Direct" scheme will grant loans of up to 30 per cent of the cost of a property to first-time buyers with incomes of less than £60,000 a year.

David Cameron, the Conservative leader, said it was "extraordinary" that Mr Darling seemed to be "talking the economy down", while George Osborne, the shadow Chancellor, claimed Mr Darling's remarks showed that Britain was being led by a "totally divided and dysfunctional cabinet".

As Downing Street expressed "full confidence" in Mr Darling, Mr Brown, speaking in Brussels, said: "The actions we are taking are actions that are designed to help the British people get through what is a difficult world economic downturn."

He added: "We are showing that, unlike previous governments that could not manage a way through these difficulties successfully, we are resilient in the way we deal with these problems."