Tory constituencies across the country are calling for rate capping to be abolished in motions for the local government debate at the party conference.
The issue has caused a split in the Cabinet and Whitehall insiders said yesterday that John Major may have to intervene to resolve the argument.
Abolishing the spending limits on councils is strongly opposed by Kenneth Clarke, the Chancellor, because it would allow councils to raise spending by increasing council taxes, and that could further damage his plans for reducing the public sector borrowing requirement.
Mr Clarke's line is opposed by John Gummer, the Secretary of State for the Environment, and other senior Cabinet colleagues. A majority of Tory Party associations who have tabled motions on capping call for it to be lifted.
Tories in London and Westminster, the seat formed largely from the constituency of Peter Brooke, the former chairman of the party, say abolishing capping would be "the clearest way to demonstrate the low tax credentials of the Conservative Party and the high tax policies of the Labour Party".
Regent's Park and Kensington North Conservatives, in a constituency mainly comprised of the former Westminster North seat of Sir John Wheeler, the Northern Ireland minister, say lifting the cap would give Labour "enough rope" to hang itself by high spending.
But that tactic is opposed by Hackney North and Stoke Newington Tories, who warn that abolition would "mean massive council tax increases and the Government will get the blame for allowing it to happen".
Tory strategists fear higher council tax bills, sent out weeks before an early summer election in 1997, would destroy the value of any pre-election tax cuts.
Whitehall sources said the issue was not resolved, although it was discussed in the Cabinet in July. One source said the outcome could depend on the Prime Minister's personal view.