Cabinet ministers fear that the turmoil in the eurozone will weaken Britain's already fragile recovery and could push the country back into negative growth.
The Treasury is drawing up contingency plans amid fears that the threat of contagion throughout the European Union could trigger a re-run of the 2008 financial crisis, with a huge impact on Britain's banks.
Privately, ministers are worried that the Coalition could pay a political price if the turmoil derails the Government's economic strategy. "If it happens on our watch, the danger is that people will think it's our fault," one cabinet source said. "It would be a hard sell to blame it on the euro, even though it would be true. It sounds like an excuse."
Vince Cable, the Business Secretary, said: "The danger is this crisis spreading. It is a danger to the UK because half of our exports are to the EU countries. If there is a major unresolved crisis in the eurozone it will have massive implications on our trade and even more the potential threat to financial stability through the banking system."
With the economy flatlining, ministers anxiously await Tuesday's growth figures for the second quarter of this year. The Opposition would seize on another set of weak figures as evidence that the Chancellor George Osborne's tough deficit-cutting strategy has strangled the recovery at birth.
The euro crisis has also provoked a split between David Cameron and Nick Clegg over how the Government should respond. The Prime Minister wants to demand back some powers from Brussels during negotiations on a proposed new EU treaty allowing the 17 eurozone countries to co-ordinate their fiscal policies. But Mr Clegg spoke out against such a strategy yesterday.
Mr Cameron delighted Eurosceptics when he told Tory MPs on Wednesday that such a treaty would provide opportunities for Britain. Sceptics want to claw back powers over health and safety, employment and social policies and to block a planned new financial services directive which could harm the City.
Ministers believe their trump card would be to threaten to call a referendum in Britain on the new treaty unless it won concessions. The treaty would need to be approved by all 27 EU members and a No vote in any of them would scupper it.Reuse content