Darling: I’ve been stitched up by No 10 on stamp duty

Allies of Mr Darling believe he was ‘stitched up’ by a Downing Street briefing operation designed to test the popularity of possible moves to suspend the tax.

The Chancellor, who was unable to confirm or deny the plan, was then subjected to a barrage of criticism for bringing the housing market to a halt as buyers pulled out of purchases in the hope of making future savings.

'Undermined': The Chancellor could face demotion in a reshuffle

Mr Brown’s camp furiously deny being behind the shambles but one senior Treasury source said last night: ‘It certainly wasn’t us that briefed it. You work it out.’

In a sign of the fevered atmosphere gripping the party, a Labour MP close to Mr Darling claimed he was being deliberately undermined by No10 in preparation for being demoted in the September reshuffle.

Leadership rival David Miliband could then be ‘cemented in’ by being handed the Treasury.

‘They’re lining him up for a fall. It was bungled but it was an attempt to diminish Alistair,’ the MP said.

‘The way they did it suggests that Darling is not in control and doesn’t know what’s happening. It ties in with them wanting to give Miliband the Treasury to stop him being a potential rival. I’ve spoken to two Cabinet Ministers and they both think that.’

A Treasury source added last night: ‘There’s been talk about a housing package for a while, conducted between No10 and the Treasury. The main source of tension is timing and the nature of the package.

‘It’s been dealt with at the highest level. Most of the time our hands were tied by No10 because whatever we wanted was seen in the eyes of the former Chancellor as unpicking his policies.’

Another backbencher said the mishandling of the situation reflected rock-bottom morale in Downing Street:

‘I am just amazed,’ he said.

‘It shows that the Prime Minister now is so edgy that he does things like this.’

Labour MP and former Minister Frank Field told The Mail on Sunday: ‘The outcome is pretty catastrophic – both on the impact on the economy and on the standing of the Government.’

Last night, Downing Street strongly denied having ‘floated’ the story, which appeared in newspapers on Tuesday, saying the only two people who brief in Downing Street were both on holiday at the time.

The Treasury also issued a statement to say it ‘has no knowledge of the source of the story’.