AN independent Scotland would have to surrender to intrusive budget control from London if it wanted to keep Bank of England support, the Coalition Government has suggested.

Whitehall sources said the UK would demand even stronger powers than those planned in the eurozone just to consider the First Minister's proposal. Members of the single currency are facing the prospect of stiff sanctions, including fines for overspending, as Europe tightens central control of national budgets.

The Coalition intervention, which contains no suggestion UK ministers would actually agree to the proposal, provoked a furious reaction from the Scottish Government.

A spokesman for Alex Salmond denounced the Coalition as "inept" and said: "We reject the suggestion there would be any budget oversight by the UK Government."

He also rebutted the assertion the rest of the UK would have legitimate con-cerns about Scottish spending.

The Scottish Government has "already shown we are more than capable of setting a balanced budget", he said.

The row is a sign of escalating tensions between Edinburgh and London, particularly over the issue of the economy, before the first sit-down talks between Mr Salmond and UK ministers expected next week.

Yesterday, Downing Street also rejected the First Minister's claim the Treasury would be "biting off" Scotland's hand to keep the pound. A No 10 spokesman said Scotland retaining the currency would throw up "difficult issues".

The Coalition has accused the Scottish Government of failing to set out how its claim the Bank of England would remain the lender of last resort to an independent country would work.

The crucial role is usually played by a central bank to ensure the viability of institutions considered too big to fail. Clarity on the issue was the first priority, the spokesman added, but he said the UK Government could not sign up to such an idea without significant controls, adding: "Oversight of overall spending and budget would be a general principle."

He added: "Look at what they are deciding in Europe now. Those are the controls that could be expected, possibly even greater controls."

Eurozone countries are negotiating measures that could see countries face heavy fines from EU institutions if their budgets run up too great a deficit. They would also have to enshrine a balanced budget in law and every member of the currency could have to raise taxes to pay for a strict enforcement system.

The new row centres on the First Minister's claim earlier this week that an independent Scotland could keep the Bank of England as its protection against financial crisis.

Speaking after a lecture in London, the SNP leader said he did not see using the bank as the lender of last resort as a "huge difficulty".

Last night, his spokesman said: "An independent Scotland will be in charge of our own resources and our own finances.

"We obviously have no difficulty with fiscal discipline, given that year-on-year Scotland is in a stronger financial position than the UK as a whole, but the Bank of England has no oversight over the Chancellor's Budget, and this inept Coalition will have to get used to the idea

that Scotland and England are going to have a relationship of equality. Dictating terms is no longer acceptable. Things have to be done by agreement in a positive attitude. The more Westminster tries to dictate, the stronger support for independence will become."

Professor Patrick Minford, an economist from Cardiff University, said in order to get Bank of England protection, the Scottish Government would have to pay a heavy penalty. He said if the UK was the lender of last resort they would be "very nervous about Scotland".

"Nobody would be very happy about Scotland going on a spending spree and jeopardising the rest of the UK," he said.

However, Mr Minford said he did not believe UK taxpayers would ever agree to offering such protection to another country. He said: "I think they would think, 'okay, you want it that way, mate, that makes you a foreigner' and I don't think they would want the Bank of England to be the lender of last resort under those circumstances."

That view has been echoed by others including Alistair Darling, the former Labour Chancellor, and Sir Menzies Campbell, the former Liberal Democrat leader.

On Thursday Mr Salmond defended his claims an independent Scotland would keep the pound and the insurance policy of the Bank of England as its lender of last resort. He said at the time the value of oil reserves and exports such as whisky would benefit a "sterling area" if Scotland left the UK but kept the currency.

The British Chancellor would be "biting our hands off" to keep the pound, he said.