Clarke's backers face a nightmare scenario

There was growing dismay among some of Kenneth Clarke's supporters last night at the prospect of being forced to accept a Euro-sceptic policy under the leadership of William Hague, although Tory MPs flatly denied that they were preparing to defect to the Labour Party.

Suspicions centred on the Macleod group of MPs following the disclosure by Downing Street that some Tory MPs had been in contact with the Government over a joint approach to European policy.

The group is run by strong pro-European senior Conservative MPs, including Peter Temple-Morris, and its headquarters at 4 Abbey Orchard Street are being used as Mr Clarke's campaign headquarters.

In spite of the denials of defections, some of its members have privately discussed the "nightmare" scenario of a defeated Tory rump being taken over by a Euro-sceptic leader. Under those circumstances, some MPs would refuse to take the Tory whip and sit as independents, one prominent Macleod group member said. It would be an open question then whether they would defect to the Liberal Democrats or Labour.

Paddy Ashdown, the Liberal Democrat leader, has been kept in touch by Emma Nicholson, the former MP, who defected to his party from the Tories before the last election.

The claims were an embarrassment to Mr Clarke, coming on the eve of the second leadership ballot. Mr Clarke's supporters are closely linked to the Macleod group. Its director, Justin Powell-Tuck, is acting as a press officer for the former chancellor's campaign.

Other Tory supporters of Mr Clarke were denying any knowledge of the possible splits, including Peter Luff, who is sceptical of a single currency in spite of broadly pro-European views. Michael Mates, Mr Clarke's campaign manager, dismissed the reports as "rubbish".

The Macleod group has in effect replaced the Lollards, the left-of-centre group for Tory wets, which failed to stop the rise of the right during the Thatcher era. It was formed partly to counter the growing influence of the Euro-sceptics on John Major and its members include Quentin Davies, the articulate pro-European Tory MP.

The group ran into trouble when The Independent disclosed that it was preparing to publish a policy document before the election. Denying that it was a manifesto, the group published the policy proposals as individual papers to avoid being accused of being a "party within a party".

Mr Clarke and Michael Heseltine, the former deputy prime minister, have both warned Conservative MPs of the dire consequences of electing a leader who shuts out pro- European MPs.

They point explicitly to the stance taken by Mr Hague, who is not only ruling out a single currency for a decade, but is also insisting that all shadow cabinet ministers should toe that line.

That would make it impossible for Mr Clarke to join Mr Hague's shadow cabinet, forcing him on to the Conservative back benches for the first time since he was appointed a junior government whip by Edward Heath back in 1972. That is a measure of the change that would take place in the Conservative Party if Mr Hague is elected, as expected.