A DEAL between Scotland and the rest of the United Kingdom to share sterling could be struck, but only on terms leaving the newly independent country with little control over its monetary and fiscal policy, according to an economics think tank.

Fiscal Affairs Scotland says these conditions would be such that "to some this may seem at odds with the needs of an independent Scotland, as well as the rationale for it".

It argues Treasury objections would place "considerable obstacles in the way" of a currency deal being agreed.

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Scotland would have to agree to a common regulatory framework and supervisory standard, a clear support framework for times of crisis and, crucially, adherence to UK Government fiscal rules and targets.

The result of this would be severe restrictions on Scotland's ability to run its own monetary policy and set its overall fiscal targets, and could limit policy options such as setting its own rate of corporation tax.

It would also involve regulatory restrictions "that are likely to have a severe limit on Scotland's ability to have a unique financial sector, as opposed to a regional version of that operating in London".

The report concludes a deal would depend not just on rational arguments but political negotiations and, more importantly, how the international markets respond to whatever agreement was reached.

Jo Armstrong, executive director of Fiscal Affairs Scotland, said: "For the two governments to reach agreement over the fiscal rules and practices that would need to apply is only the first step towards achieving a working and long-term sustainable currency union.

"Debt and regulatory negotiations would also be needed, as would ensuring whatever is proposed meets the potentially conflicting expectations of both the general public and the financial markets."

Her fellow executive director John McLaren, said: "Our analysis shows that while there may well be a way to allay the UK Government's economic concerns over the implications of a currency union, the consequences of reaching such a compromise means that Scotland will effectively have little in the way of control over its monetary and fiscal policy.

"To some this may seem at odds with the needs of an independent Scotland, as well as the rationale for it. Equally, concerns on the degree of trade-off that is required to satisfy both sides may mean that it is difficult in practice to conclude a successful negotiation."

Their report states that even if the makings of a currency union deal were reached, there would need to be negotiations on Scotland's repayments on UK debt and a response from both governments on how the markets react to the details of a deal.

A spokesman for Finance Secretary John Swinney said of the report: "The pound is as much Scotland's pound as the rest of the UK's, and a currency union is in the interests of both - which is why the Scottish Government proposes it, and which is why it will be agreed after a Yes vote.

"The Fiscal Commission Working Group - which includes two nobel laureates - has addressed these issues in detail, and we have always said that there would need to be agreement on borrowing and debt."

But he added: "Independence will give Scotland access to 100 per cent of our tax revenues -compared to 7 per cent at present under devolution - and the full fiscal levers and welfare powers which will enable us to use our immense wealth to build a fairer society and more prosperous economy. It also means we are protected from the ideologically-driven cuts Westminster continues to impose on Scotland."

Meanwhile, a former chairman of the Prudential and a former deputy governor of the Bank of England claim that the threat to renege on a share of UK debt if there is no deal on currency union is "morally indefensible" and "economically incomprehensible". Sir Martin Jacomb and Sir Andrew Large say: "Default because you cannot pay is one thing; default because you refuse to pay is another."