Chancellor Alistair Darling could strip the Bank of England of key powers amid a spat with governor Mervyn King, it was revealed today.
The Financial Services Authority (FSA) is reportedly set to be given responsibility for maintaining "financial stability" as part of regulation reforms.
The news emerged as shadow chancellor George Osborne dismissed "ridiculous" claims that he was too close to Mr King and had been leaked privileged information.
Mr Osborne also suggested that Gordon Brown had been personally briefing against the governor.
"These are allegations that are simply not true," he told BBC Radio 4's Today programme. "They are made by Labour Cabinet ministers, sometimes by the Prime Minister in private to people.
"I think it seems more about the political situation of the Government than frankly the entirely proper and correct relations between the Opposition and the independent central bank."
Mr King embarrassed the Government this week by telling MPs he wanted to see tougher action to cut "extraordinary" levels of borrowing.
He also warned that prospects for economic recovery were "more uncertain than ever", despite increasingly optimistic statements from ministers.
Earlier this month, at an extraordinary Mansion House dinner, the Chancellor and the governor set out markedly different positions on regulation and the handling of public debt.
Treasury Chief Secretary Liam Byrne insisted this morning that Mr Brown, Mr Darling and Mr King all worked together extremely well.
But reports indicated that the Bank is set to lose its remit for maintaining financial stability as part of reforms.
A Banking Bill due to be published next week could give the FSA that statutory responsibility, despite criticism of its performance in the run-up to the credit crunch.
The move would be in sharp contrast to the Tories, who want to bolster the Bank's powers in order to improve regulation.