George Osborne is facing a political storm after being accused of "irresponsibly" warning that sterling could be about to collapse.
The shadow chancellor was held to have broken convention and risked undermining the crucial G20 financial negotiations by "talking down" the pound.
In an interview with The Times, Mr Osborne delivered a ferocious attack on the Government's economic policy, insisting that massive state borrowing to fund a "fiscal stimulus" of tax cuts and higher spending would be reckless.
"The more you borrow as a government the more you have to sell that debt and the less attractive your currency seems," he said.
"Sterling has devalued rapidly against the euro and the dollar. We are in danger, if the Government is not careful, of having a proper sterling collapse - a run on the pound."
Mr Osborne, who has been criticised within the Conservative Party over his response to the global financial crisis and holiday links with Russian oligarch Oleg Deripaska, later appeared to tone down his intervention.
In a statement, he highlighted the fact that the pound had dived by 30% against a basket of currencies over recent months, but did not repeat his most controversial remarks about the prospects for it to fall further.
"What we're seeing before our eyes is the largest fall in the pound in modern British history," he said. "The Brown devaluation of 30% in recent months is bigger than the Wilson devaluation or the Callaghan devaluation."
Aides indicated that Mr Osborne had not been aware of any convention against senior politicians discussing sterling's troubles.
Read More
However, the fact that Tory leader David Cameron did not publicly back his ally was taken in some quarters as a bad sign for his future. Some MPs suggested that the shadow chancellor could find himself in serious trouble if the pound plunges when currency markets open again on Monday.
