George Osborne called last night for an end to the political furore over City bonuses and pay, warning that it threatened to create an "anti-business culture" that could cost jobs.

The Chancellor spoke after Labour stepped up its demands for a tough clampdown on "excessive" rewards for top banking executives. Business leaders, tacitly supported by many Conservative MPs, are anxious that the Government is undermining Britain's appeal to foreign investors by joining the condemnation of large executive rewards.

They fear ministers put pressure on Stephen Hester, the chief executive of the Royal Bank of Scotland, to waive his annual bonus last week of £963,000 in shares. Mr Osborne sought to reassure business by calling for the temperature over the issue of executive pay to be lowered.

Speaking to the Federation of Small Business, he said: "Rewards for failure are unacceptable - and those who believe in the free market are the first to say so. But a strong, free market economy must be built on rewards for success. There are those who are trying to create an anti-business culture in Britain - and we have to stop them. At stake are jobs and prosperity for the many."

In a Commons debate last night, Chuka Umunna, the shadow Business Secretary, protested that bankers, "right at the centre of the crisis", continued to receive handsome rewards while the rest of Britain faced "the biggest squeeze on living standards in a generation".