Defence Secretary Liam Fox has warned of the risk of a "new nuclear arms race" as he defended the renewal of Trident as the most cost-effective way of maintaining Britain's deterrent.
Dr Fox was speaking just hours after Chancellor George Osborne made clear in public for the first time that the Ministry of Defence will have to bear the full cost of replacing the UK's ageing nuclear submarines from within its core budget.
His decision represented a bitter defeat for Dr Fox, who was engaged in a behind-the-scenes battle with the Treasury over the costs of renewing the deterrent, which was traditionally funded from outside the MoD budget.
The Defence Secretary warned earlier this month that it would be "very difficult" to maintain the MoD's other capabilities if it was required to fund the estimated £20 billion capital cost of four new subs.
Although the cost would be spread over several years, experts estimate that it could consume up to £1.5 billion of the MoD's £36 billion annual budget at a time when savings are being demanded.
But Mr Osborne left no doubt he rejected Dr Fox's pleas, telling Bloomberg: "All budgets have pressure. I don't think there's anything particularly unique about the Ministry of Defence. I have made it very clear that Trident renewal costs must be taken as part of the defence budget."
The development sparked speculation that the MoD may be forced to scale back Trident, perhaps by cutting back to three subs.
Speaking to Metro newspaper, Dr Fox warned against complacency over the need for Britain to maintain its deterrent.
"Should Iran become a new nuclear weapon state, Saudi Arabia, Egypt and Turkey would be likely to follow suit and we could see ourselves in a new nuclear arms race," the Defence Secretary warned. "There are a lot of real dangers out there and I'm not sure people have really focused on them."
The MoD received some protection in the autumn spending review - being ordered to draw up plans for cuts of between 10% and 20%, compared with the reductions of 25% to 40% facing most other departments. But the concern within the Armed Forces will be that other projects will now have to be axed if the MoD does have to pay for Trident renewal at a time when it is already facing swingeing cuts.