The Defence Secretary admitted today he was being forced to take "hard decisions" to ensure the plunge in the pound's value would not hinder the war in Afghanistan.
Bob Ainsworth said the exchange rate was causing "difficulties" for both his department and the Foreign Office as ministers were accused of drawing up a secret hit list of embassies to be closed.
The charge follows the disclosure yesterday by minister Baroness Kinnock that the FCO was facing a £110 million budget shortfall as a result of currency fluctuations.
Among the programmes facing cuts was the FCO's counter-terrorism in Pakistan and anti-narcotics work in Afghanistan, she said.
Speaking at a display of upgraded kit for frontline troops, Mr Ainsworth said the budget for Afghanistan remained the "overwhelming priority".
But he said: "It doesn't take a genius to know if that if the pound exchange rate changes then that gives us issues, it gives us difficulties and we have to deal with those difficulties.
"Our priorities are still our priorities and, if necessary, we will move money in order to protect those priorities and that means we will have to take hard decisions elsewhere."
Shadow foreign minister David Lidington said an internal FCO memorandum revealed officials had been ordered to work up plans for substantial cuts "which could be implemented soon after the election".
When asked whether potential cuts to anti-narcotics services in Afghanistan were "bordering on scandalous", Mr Ainsworth added: "We will protect the priorities and yes of course the budgets are under pressure, the Foreign Office budget, my budget - but we will continue to move money around and take tough decisions so we do not cut what the priority work is.
"I wrestled with a lot of budget difficulties before Christmas and we managed despite the pressures to put more money into the Afghanistan operation."
Baroness Kinnock said programmes were being cut just as Gordon Brown was announcing plans in the Commons to step up security in the face of the terrorist threat.
The Prime Minister, speaking today on a visit to a housing estate in Stevenage, Hertfordshire, said: "Counter-terrorism expenditure in Pakistan and generally is increasing this year and will increase next year."
He added: "It is important to recognise our counter-terrorism effort is also linking up the efforts of our police forces here and our border control system, which is keeping the country as safe as possible."
In an emergency Commons question, Mr Lidington said the shortfall in the FCO budget was a direct result of the Treasury's decision to remove the pricing mechanism which had protected it from currency fluctuations.
He said he had seen an internal FCO memo from last December which stated further cuts "should not be achieved by salami-slicing but instead by stopping activity, closing posts and reducing staff numbers".
He said the memorandum said the plan was discussed with Foreign Secretary David Miliband and his ministerial team on December 21.
"It frankly suggests that we have a Government, and in particular a Prime Minister, which is indifferent to the point of negligence towards the global interests of the UK," he said.
Foreign Office minister Chris Bryant acknowledged the Foreign Office was facing "very significant challenges" but denied there was a list of overseas posts facing closure.
"We believe that it is absolutely vital that we maintain our presence in the world," he said.
He said FCO spending on counter-terrorism work was continuing to increase from £35 million in 2008-09 to £36.9 million in 2009-10, rising to £38 million in 2010-11.
The memo obtained by Mr Lidington, entitled Board Key Points, warned: "We know that next year will be a lot tougher than this year. This is partly because we just have less money (like all Departments we have to make further efficiency savings next year).
"But it's mostly because the value of our budget is continuing to decline as sterling has dropped against other major currencies. Since we spend most of our money abroad in foreign currency, that means the pounds we have to allocate will buy less."
The memo said the board had agreed to make some cuts in "programme spending" - which covers work on issues like counter-terrorism and climate change - in order to ease the financial pressure on staff.
"Even with cuts to programme to subsidise admin, next year's admin budgets will still be substantially less than this year," said the memo. "We were clear that further cuts could and should not be achieved by salami slicing: it would require us to stop activity, close posts and reduce staff numbers.
"That is not where any of us, including the Foreign Secretary and his ministerial team with whom we discussed this on December 21, want to end up. And any strategic decisions about the future size and shape of the FCO will be for whatever government comes to power after the UK elections."
Directors and heads of mission should not make "irreversible" decisions now but were being asked to work up "contingency plans for substantial cuts which could be implemented soon after the election if the new government decides not to allocate additional funds to the FCO".
No decisions on the size and shape of the Foreign Office or the UK's network of embassies overseas would be made until after the election, said the memo, which added that the board would continue to campaign for a "properly-funded" department.
The Foreign Office's top civil servant, permanent secretary Sir Peter Ricketts, today acknowledged the department was facing "difficult cuts and reprioritisation" as a result of the fall in the value of the pound.
Writing in the February edition of Public Servant magazine, Sir Peter said his officials' financial management skills were "being put to the test as the FCO seeks to manage the huge impact on our budget of the fall in the value of Sterling since 2008".
"More than 50% of our spending is in foreign currency. We face difficult cuts and reprioritisation."
Liberal Democrat foreign affairs spokesman Edward Davey said: "Cuts to essential counter-terrorism work in Pakistan are simply unacceptable.
"It is outrageous that on the same day that Gordon Brown told the Commons that the Afghanistan-Pakistan border is the crucible of terrorism, his Foreign Office Minister told the Lords the budget to counter-terrorism there has been slashed.
"When our troops are in Afghanistan to fight the terrorist threat, it is a betrayal of their sacrifice to slash the diplomatic budget crucial to crushing the very source of that threat."Reuse content