One of the Chancellor's key business advisers has attacked the Government's clampdown on non-domiciled workers as a return to the days of old Labour and urged Alistair Darling to exclude the proposed rules from next week's Budget.

Alan Yarrow, the vice-chairman of Dresdner Kleinwort and a member of Mr Darling's high-level advisory group on the City's competitiveness, said that the changes risked stifling entrepreneurism.

Mr Yarrow, who is also chairman of the London Investment Banking Association (Liba), said: “One gets the impression that an awful lot of what's been happening is a knee-jerk reaction to a Tory initiative which has not been properly thought through but which could have a disproportionate effect on the City.”

He added: “This is what you would expect the old Labour party to do. The green-eyed monster. It's done for principle and fairness rather than economic benefit but there's got to be a balance between the two. The actual cost of them doing this could be a multiple of the revenue benefit.”

Mr Yarrow said that Liba had submitted its response to Mr Darling by last week's deadline. At least 40 per cent of the City's investment banking population was registered for tax purposes as non-domiciled, he said, while 60 per cent of senior managers in the sector fell into the category. “We're saying to Alistair Darling, whatever you do, don't push foward with this. It deserves proper analysis,” Mr Yarrow said.

His comments came yesterday as the British Bankers' Association (BBA) sent an eight-page letter to the Chancellor criticising the Treasury's handling of non-doms and Northern Rock for damaging the City's international competitiveness.

Angela Knight, the BBA chief executive, said: “People are questioning our regulatory and tax regimes, that in the past have been such a big part in convincing people of the attractiveness of coming to the UK.”

Ms Knight said that while foreign finance workers were being deterred by the non-dom tax, foreign banks had told the BBA that they were put off by an “aggressive attitude” at Revenue & Customs.