Brown wields axe after Mandelson's return

The fallout from Peter Mandelson's return to the Cabinet began yesterday, as the Prime Minister wielded the axe and sacked ministers for speaking out against his leadership.

Gordon Brown's closest ally, Ed Balls, described the decision to bring back Mr Mandelson as a "risk" – fuelling suspicions that he had tried to prevent the controversial appointment.

As Westminster remained in a state of shock yesterday, it emerged that the former European trade commissioner imposed a series of conditions on his return, including the side-lining of one of the Prime Minister's key lieutenants. Mr Mandeslon is also expected to be given a role in drawing up Labour's election manifesto, a move likely to cause further recriminations among MPs.

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Mr Brown's concessions proved that the balance of power in the Cabinet has shifted, with Mr Mandelson now one of the most important figures around the top table.

The new Business Secretary warned David Miliband, the pretender to the Labour leadership, that his hopes of challenging were finished. In a pointed reference to the Foreign Secretary and other Blairites positioning to challenge for the leadership, Mr Mandelson said: "I think there is a real desire to sink whatever differences may have existed in the past year."

Sources revealed how Mr Brown and Mr Mandelson – sworn enemies for 14 years – had spoken at length nearly every day since May, paving the way for one of the most startling of rapprochements in political history.

There were even suggestions last night that the PM could also bring back David Blunkett, who resigned from the Cabinet twice under Tony Blair.

Ministers earmarked by Downing Street for being less than supportive of the Prime Minister found themselves without jobs yesterday. They included rail minister Tom Harris, who became the first ever minister to announce on his blog that he had been sacked.

Rosie Winterton was sacked as minister of state for transport.

Phil Woolas, was given the high profile role of immigration minister, despite controversial comments on the subject.

In 2006 the MP for Oldham and Saddleworth warned the wearing of the Muslim veil caused "fear and resentment" while last year he spoke against inter-marriage in the Pakistani community.

Mr Mandelson insisted last night that despite "darker moments" with the Prime Minister, they had "never entirely lost our friendship".

"What's important is what things are like now, and will be in the future. And from here on in we're joined at the hip," he told the Observer.

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Mr Balls, the Schools Secretary, is said to have tried to talk Mr Brown out of bringing back Mr Mandelson to the Cabinet for a third time. Asked about the appointment, Mr Balls told Sky News last night: "Of course it's a risk, but at the same time, it's also a great opportunity for our country and our Government. Gordon Brown looked at this carefully and he decided it was worth that risk and I think that was the right thing to do."

Other allies of Mr Brown privately expressed their horror at the move. One said: "I'm not calling it a betrayal, but that is what this will be seen as by others – a betrayal."

Former minister Peter Kilfoyle described Mr Mandelson's appointment as a "dreadful error".

The Prime Minister will address the parliamentary Labour Party tomorrow, as MPs return to Westminster for the first time since July.

Mr Mandelson will begin work as Business Secretary tomorrow when he joins 17 other cabinet ministers and financial experts for the first meeting of the economic "war" council. They will be joined by new Climate Change and Energy Secretary, Ed Miliband.

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Mr Mandelson, who quit as EU trade commissioner on Thursday, is expected to be formally elevated to the House of Lords this week.

Many MPs are likely to view the move as divisive.

In a sign of how powerful Mr Mandelson has become after four years in exile in Brussels, an insider revealed he requested the removal of Damian McBride as Mr Brown's chief spin-doctor to a strategic backroom role. And a cabinet minister close to Mr Brown was among those also to have been appalled at Mr McBride's "destructive" behaviour, including his 3am briefing of Ruth Kelly's resignation in the lobby of the Midland hotel in Manchester during the Labour Party conference.

As The Independent on Sunday revealed in August, Stephen Carter was ousted from his role as communications and strategy chief. He will become Lord Carter and Communications minister.

Ian Austin, Mr Brown's parliamentary private secretary, was promoted to Minister for the West Midlands and a whip.

Jon Cruddas, the prominent backbencher, was offered a number of middle-ranking ministerial roles. But the MP for Dagenham turned the offers down, telling the Prime Minister he wanted to focus on his constituency, where there is a threat from British National Party activism. Mr Cruddas will instead have a party role leading campaigns against the BNP.

Margaret Hodge, a close friend of Tony and Cherie Blair, who resigned as Arts minister, leaves the Government. But members of the September 2006 attempted coup against Mr Blair have prospered. Siô*Simon was made a whip while Chris Bryant, a ministerial aide to leader of the Commons Harriet Harman, was promoted to be her deputy. Shahid Malik, Britain's first Muslim minister, becomes a minister in the Department for Justice.

A poll of marginal constituencies suggested Labour could lose 164 seats in the forthcoming general election, handing a landslide victory to David Cameron's Conservatives. The ICM survey in the News of the World suggested Mr Cameron would have a 78-seat Commons majority if repeated in an election.

The battles ahead for beleaguered PM

Autumn 2008 Human Fertilisation and Embryology Bill. The troublesome legislation returns to the Commons, with plans to make it easier for women to obtain early abortions the latest of a series of flashpoints. A date has yet to be set for the next stage of a Bill that has already sparked rebellions. The departure of two Catholic ministers might make cabinet debate less volatile.

6 November Glenrothes by-election. Labour will defend a 10,000 majority from the last general election, but the polls suggest the Scottish National Party will repeat its performance in Glasgow East and snatch another "safe" seat. Mr Brown delayed the election, forced by the death of John MacDougall, but the SNP leader and Scottish First Minister Alex Salmond, above, has long been campaigning. The PM will again face demands for him to campaign in person – something he refused to do in Glasgow.

November 2008 Pre-Budget Report. Much is expected of Alistair Darling, not only because of the global economic situation, but because the Chancellor has political capital to retrieve after disasters including the abolition of the 10p tax rate. Labour backbenchers are demanding a retreat from plans to increase Vehicle Excise Duty for cars up to seven years old.

June 2009 Elections to the European Parliament and local councils. Mr Brown's most significant electoral test so far. Tony Blair lost six MEPs in the 2004 elections, leaving Labour with eight fewer Euro MPs than the Tories, but recovered to win a general election a year later. Few expect Mr Brown will be able to recover so dramatically if he cannot get close to the Tories in the next eight months.