The government spun the wheel of fortune last week and came up with two lemons and a raspberry. After its mauling over the redeployment of troops in Iraq, the cabinet walked into a fresh storm of criticism over plans for gambling reform that raised the spectre of casinos on every high street and Britain as a nation of roulette addicts.

Mutinous noises from Labour backbenchers swelled a chorus of outrage from religious leaders, gambling experts and welfare organisations. All condemned the Gambling Bill, published on Tuesday, for opening the way to Las Vegas-style gaming.

What the government saw as a measured response to calls for change, on which it believed political consensus had been achieved, quickly went out of control.

Labour loyalties, stretched thin over Iraq, were said to be at breaking point. Tessa Jowell, the culture secretary, who is in charge of the bill, joined Geoff Hoon, the beleaguered defence secretary, in the firing line.

Accusations flew thick and fast. The government, it was said, had succumbed to a £100m lobbying campaign by American operators poised to build casinos in London at Wembley, the Millennium Dome and Earls Court, and at Ibrox football ground in Glasgow and at St James’ in Newcastle.

Councils across Britain, it was reported, were being offered multi-million-pound sweeteners by casino operators to approve planning permission for the ventures.

Instead of spurning these rapacious advances, local authorities were demanding a permanent share of the profits.

Britain, we were told, was already in the grip of a gambling frenzy that placed us top of the European league table and third in the world, behind the United States and Japan. With predictions that the number of gambling addicts would double from 350,000 to 700,000, compounded by a government admission that spending on gambling would rise by almost 40% by 2010, steam began to pour from the ears of the great and the good.

The last straw for many was a threatened ban of fairground amusements, such as “grab a toy” and “penny fall” machines, that might spell the end of seaside arcades in the name of the government getting tough with children’s gambling.

The suspicion that the poor are being enlisted in a scheme to bring the Treasury a tax windfall — £260m a year according to one estimate — has added to Labour MPs’ unease. Peter Kilfoyle, a former defence minister, said: “It will be yet another form of regressive taxation on Britain’s hard-working families.”

Frank Field, a former welfare minister who is leading a campaign to defeat the bill at its second reading on November 1, says its implications offend the most fundamental traditions of the Labour party. “The government is almost beginning to behave irrationally,” he says. “When its history is written, I wonder whether this is the week when people began to feel that the government was beginning to unravel.”

How did the government get into this mess and what exactly is it proposing? To understand the furore, scroll back to 1968, when the Gaming Act imposed restrictions to protect gamblers and keep organised crime at bay. Casino operators were forbidden to advertise and gamblers, compelled to sign up as members 24 hours in advance, could not drink on the premises.

In the main the legislation succeeded in keeping the industry clean, although its straitlaced approach was in marked contrast to the relaxed stance of casinos in Las Vegas and on the Continent.