Prime Minister David Cameron personally intervened to limit cuts to the defence budget in next week's comprehensive spending review, it has emerged.
Chancellor George Osborne had ordered the Ministry of Defence to find cuts of at least 10 per cent as part of his drive to eliminate the UK's structural budget by the end of the Parliament, but Defence Secretary Liam Fox has fought a tough rearguard action to protect the military in the hardest-fought battle of the spending round.
MoD sources confirmed last night that a deal had been reached, describing it as "a settlement we can work with".
And it emerged that Mr Cameron spoke up personally for the armed forces, insisting that they had to be given a budget which allowed them to do the job.
It is now understood that the MoD is now facing a reduction of around 8 per cent to its £37 billion annual budget on Wednesday, when Mr Osborne unveils a CSR which will usher in the deepest cuts in public spending of modern times.
Meanwhile, unconfirmed BBC reports suggested that schools too would be spared the brunt of the cuts, with real-terms increases in their budgets over the next few years - possibly paid for by cuts in other parts of the Department for Education.
The Daily Telegraph reported today that Mr Cameron stepped in after the new head of the Army, General Sir Peter Wall, warned him that excessive cuts would threaten Britain's mission in Afghanistan.
The Chief of General Staff was reported to have told Downing Street he would not accept cuts in Army numbers and training which would hamper the Afghan operation.
Official sources would not give any figures for the settlement finally reached between Mr Osborne and Dr Fox. Some senior military officers feared that they would be asked to absorb reductions in their budgets of as much as 20%.
BBC2's Newsnight reported last night that the Royal Navy will get its two new aircraft carriers, which were widely seen to be at risk from the cuts.
But the number of Joint Strike Fighter F-35 jet planes which the new ships will carry is to be cut from 138 to 40, said the programme.
Meanwhile, the Navy's fleet of larger ships, such as frigates, will be cut from 24 to 16.
And the Army will face a 7,000 cut in manpower and a reorganisation into five combat brigades of 6,000 troops each, down from the current eight.
The reorganisation will be made possible by the withdrawal of troops from Afghanistan and remaining bases in Germany.
According to Newsnight, a late draft of the National Security Review - due for publication on Monday - identifies the greatest threats facing the United Kingdom as terrorist attacks from groups such as al Qaida and cyber-attacks on vital computer networks.
Military conflict with another state is listed only fourth, behind natural disasters, and the document states that the UK's future strategy will be to seek to prevent conventional wars, while retaining the ability to respond to military threats.
Deputy Prime Minister Nick Clegg has announced a £7 billion "fairness package" for education, including a pupil premium to support schools which take children from disadvantaged background.
According to the BBC, this will result in real-terms budget increases for schools, though this would still be less generous than the settlements reached under the previous administration.
A Department for Education spokeswoman said that discussions on the settlement were continuing and she could not confirm the reports that schools would be protected.
Mr Cameron will spend the weekend ensconced in last-minute talks with other ministers at his country residence Chequers to finalise the CSR.
His spokesman said that the Government was "nearly there" and all settlements will be completed before Monday.
The figure of 8 per cent as final budget reduction was reported by the BBC today.
However, the department may lose more in cash terms because it is also being required to deal with a capital project over commitment totalling around £38 billion left behind by the departing Labour administration.
Sources suggested that £750 million will be trimmed over the coming four years from the budget for replacing Britain's Trident nuclear deterrent.
It is thought that several RAF bases will be closed and Britain's fleet of Harrier jets may be facing the axe, leaving the Navy's aircraft carriers incapable of launching fighter planes until the JSF comes into service around 2018.
Former First Sea Lord Sir Jonathon Band - head of the Navy until last year - told The Sun the loss of the Harriers would limit Britain's ability to conduct an operation like the recovery of the Falklands in 1982.
"It would have serious implications not only for our defence posture, but also how we would be seen in the maritime world," said Sir Jonathon. "It would remove at a stroke one of our classic reaction capabilities for any emergency scenario."
Mr Cameron's intervention came after the head of the armed forces, Chief of the Defence Staff Sir Jock Stirrup, the Navy's current head Admiral Sir Mark Stanhope, General Wall and the RAF's Air Chief Marshal Sir Stephen Dalton approached him together to express their concerns about the potential impact of cuts. They are believed to have argued for the reduction in the MoD's budget to be limited to 4 per cent.
And concern was also voiced by American Secretary of State Hillary Clinton, who said the US expected Nato members to meet their target of spending 2 per cent of national income on defence.
Asked yesterday whether the scale of the reductions envisaged by the coalition "worried" Washington, Mrs Clinton said: "It does, and the reason it does is because I think we do have to have an alliance where there is a commitment to the common defence.
"Nato has been the most successful alliance for defensive purposes in the history of the world I guess, but it has to be maintained. Now, each country has to be able to make its appropriate contributions."
Former First Sea Lord Admiral Lord West, who served as security minister in Gordon Brown's administration, said that it would be "nonsensical" to scrap the Harriers before the Joint Strike Fighters were ready to replace them on board the Navy's aircraft carriers.
Lord West told BBC Radio 4's Today programme: "That clearly sounds very nonsensical. I am delighted if we are getting the two carriers. That makes sense - there is a strategic necessity for them.
"They provide four and a half acres of British sovereign territory with no over-flying rights, we don't have to put troops on the ground with all the risks of terrorism and so on, and we can influence the world and keep a stable globe, which is very important for our wealth in this country."
Stressing that he did not know the details of the defence settlement, Lord West added: "It sounds as though the decision has been made to go towards a cut in the Harriers. That is very risky.
"Let's say they go in two years. If in three years, God forbid, the Falklands go because the Argentinians decide to invade, it would be absolutely, totally impossible for this country - even if we had an Army of 10 million - to go and do anything about it."
Lord West added: "If you spend much less than 2 per cent (of GDP), you lose capability. It looks to me as though post-this... the core defence budget will come below 2 per cent and that is extremely dangerous. I believe personally that we should spend about 2.4 per cent - 2.5 per cent on defence."