The government was plunged into turmoil yesterday as the chancellor admitted the full scale of Britain’s economic crisis.

Downing Street and the Treasury launched a desperate damage limitation exercise after Alistair Darling declared that Britain was facing “arguably the worst” slump in 60 years. As Treasury aides claimed that he had been misrepresented, Darling took to the airwaves to clarify his remarks.

However, instead of reassuring voters, the chancellor risked compounding the crisis by failing to modify his dire assessment. Darling insisted it was his duty to be “straight” with people. His warning that the slump will be “more profound and long-lasting than people thought” comes at the worst time for Gordon Brown as he struggles to shore up his leadership.

Hazel Blears, the communities secretary, moved to reassure voters, saying: “We know things are tough and understand that people are worried. But Britain’s economy is fundamentally strong.”

MPs and activists reacted with anger. Mark Todd, a Labour member of the Commons Treasury committee, said: “I must admit that by my own measurement this would be an exaggeration. The economy appears to be surviving rather better than he suggests. I was surprised by his language.”

One senior Labour figure, who was out canvassing voters, said: “This hardly gives activists a morale boost. We are out on the doorstep, trying to reassure people, at the same time as Darling is telling them we are all doomed.”

The comments threaten to overshadow the minor measures to help first-time housebuyers and those facing repossession that Brown is expected to announce this week. In a further blow to the prime minister, it has emerged that Stephen Carter, his high-profile strategist, is to move to a new role at Downing Street following a bitter turf war with Brown’s long-standing aides.

Darling himself hints at a rift at the heart of government, saying cabinet rivals are “actively trying” to do his job. His comments are seen at Westminster as a barely concealed attack on Ed Balls, Brown’s closest confidant.

Last night some Labour MPs were openly questioning the chancellor’s judgment, while others labelled his comments “astonishing” and accused him of jeopardising attempts to turn around Labour’s disastrous poll ratings.

It emerged that last week Yvette Cooper, Darling’s deputy, had circulated a memo on the economy to Labour spin doctors striking a markedly different tone from her boss.

The document urged special advisers to acknowledge conditions are “tough” but to emphasise that the picture is not as bleak as the recessions of the 1970s, early 1980s and 1990s, each of which saw a doubling of unemployment and prolonged economic misery.

Cooper’s briefing note chimes with the language used by other members of the cabinet recently when asked about the economy — suggesting that Darling’s grim prognosis is at odds with the message that his colleagues want to give.

Just days ago, Brown himself had insisted that the economy was “resilient”.

George Osborne, the shadow chancellor, said: “Who is telling the truth at the top of government? It’s not clear whether Alistair Darling meant to tell us the truth about the mess that 10 years of Labour have left our economy in, but he has certainly let the cat out of the bag.”

Darling made the comments in a magazine interview as Labour prepared for another difficult by-election in Brown’s backyard. Despite a majority of more than 10,000, the party is expected to lose Glenrothes to the Scottish National party.

Brown’s economic relaunch package, to be unveiled this week, will focus on the housing market and energy bills. A plan to help all families with an across-the-board winter fuel payment is thought to have been replaced by targeted help for those most at risk of so-called fuel poverty.

There will also be a range of measures in response to the housing crisis, including the acquisition of unsold properties for social housing, an expansion of shared equity schemes to help first-time buyers and a savings scheme to help the same group build up deposits more quickly.

One longer-term idea being examined by the Treasury is a scheme for state-backed mortgages. Brown is said to believe this could be the “big bang” the government needs to revive its ratings, but experts warn it would be too costly.

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