THE Coalition will today send the strongest signal yet that the UK could veto a currency union with an independent Scotland as the "significant economic risks" would be too great for it to bear.

Underlying how the issue of a proposed sterling zone is now central to the battle over independence, the Scottish Government has today published its response to its own working group on the subject.

It insists a monetary union would be the "best option" for an independent Scotland.

A spokesman insisted it was not an attempt to wreck the Treasury's push on a subject the Chancellor regards as a strong suit for the UK Government.

In its second policy paper on independence, Whitehall warns the markets could sense a weakness in a currency union that was seen as either not durable or simply transitional and, consequently, put intense pressure on the pound from day one.

Whitehall sources said that, because the UK would be the larger economy, it would face the bigger "asymmetrical" economic risk from a fall in the value of sterling, threatening higher inflation.

They said the ratio of any currency union between the UK and Scotland would be 90/10; a greater imbalance than exists in the eurozone where, for example, Germany makes up just 30% of the euro area economy.

One said: "The risk for the UK would be even more pronounced than for those countries in the eurozone."

The UK Government paper – to be launched today by George Osborne and his deputy Danny Alexander in speeches to business leaders in Glasgow – stresses: "Even with constraints in place, the economic rationale for the UK to agree to enter a formal sterling union with a separate state is not clear."

It draws on expert analysis and sets out four options for an independent Scotland: a currency union with the UK; adopting the pound without a currency union; joining the eurozone; and introducing a new Scottish currency.

However, the Treasury paper concludes all four alternative currency arrangements under independence would be "likely to be less economically suitable for both Scotland and the rest of the UK" than the status quo.

It says that, even if a currency union was agreed, Scotland would "need to agree a negotiated set of constraints on its economic and fiscal policies".

The paper says independence would mean institutional and policy divergence between Scotland and the UK, leading to a weakening of economic integration.

This would, it is claimed, cause monetary policy, set by the Bank of England, to become "less appropriate over time for an independent Scottish state's economic conditions".

It argues it would be highly likely an independent Scotland would have "higher funding costs and face more constraining market conditions".

The paper concludes: "If financial markets perceive a currency union – or a fixed exchange rate regime – is not economically or politically durable or only a transitional arrangement, speculative activity can put immediate pressure on the arrangement."

In a separate development, Alistair Darling, who leads the Better Together campaign, also questioned whether the UK would want to join a "messy eurozone-style" currency union with an independent Scotland.

The former Chancellor said: "After the failings of the eurozone, and given the rest of the UK would already have the pound and the security of the Bank of England, would they go out of their way to set up eurozone-type arrangements?

"We have no way of knowing whether it would."

At Holyrood, the Scottish Government responded to the report of its Fiscal Commission Working Group on currency and monetary policy, endorsing the findings that sharing the pound was the "commonsense" move.

Finance Secretary John Swinney said: "A sterling zone, with the pound as a shared currency, will provide the full flexibility to set tax and spending decisions to target key opportunities and challenges in Scotland."

Insisting it would be as much in the UK's interests as it would in Scotland's, he added: "An independent Scotland using the pound will mean sterling's balance of payments will be supported by Scotland's huge assets, including North Sea oil and gas, which alone swelled the UK's balance of payments by £40 billion in 2011/12."

Meanwhile, the SNP Government branded the Coalition's assertion Scottish banknotes could be lost after independence as a scare story.

Mr Swinney said: "It is a ridiculous claim, totally at odds with the facts, because the existing situation regarding Scottish banknotes, which is underpinned by the 2009 Banking Act, will stay in place as part of a post-independence sterling zone.

"The fact is the pound is every bit as much Scotland's currency as it is England, Wales and Northern Ireland's."