THE SNP's plan to keep the pound after independence has suffered a serious blow after Chancellor George Osborne warned the UK was unlikely to enter a formal currency union.

He said the rest of the UK's 58 million people would have to relinquish some of their sovereignty to a nation of five million and expose themselves to new economic risks in any formal deal between the two countries.

Launching a Treasury analysis of an independent Scotland's currency options in Glasgow, Mr Osborne asked: "Why would the citizens of the rest of the UK think it's worth the risk?

"It is unlikely the rest of the UK would agree to this arrangement or that this arrangement could be made to work."

His comments were dismissed by Finance Secretary John Swinney and questioned by economists, who argued a sterling zone could be negotiated, though it would place considerable constraints on an independent Scotland's economic policies.

However, the Chancellor said the UK's reasons for entering a currency zone would not be as strong as those of Scotland.

He said joining forces with an independent Scotland heavily reliant on fluctuating oil revenues would place strains on a formal pact to share the pound.

Mr Osborne also warned questions about the durability of a sterling zone, after speculation an independent Scotland might eventually create its own currency, would make a deal harder to agree.

Those factors, he suggested, would outweigh the advantages of a currency union with the rest of the UK, as only 5% of its exports go to Scotland.

He added: "The fundamental political question this analysis provokes is this – why would 58 million citizens give away some of their sovereignty over monetary and potentially other economic policy to five million people in another state?"

Mr Osborne refused to rule out the need for a referendum south of the Border to answer that question.

He said an independent Scotland would have to accept significant limits on its tax and spending policies if a deal could be struck.

However, he insisted: "The only way to be sure of keeping the pound as Scotland's currency is to stay in the UK."

Mr Osborne appeared with Chief Secretary to the Treasury Danny Alexander to launch the Treasury paper, Scotland Analysis: Currency and Monetary Policy, at the Trades Hall in Glasgow's Merchant City.

The document discussed four options for an independent Scotland: the SNP's sterling zone plan; keeping the pound without a formal deal; joining the euro; and creating a new currency.

Mr Osborne accused the SNP of adopting three of the four options over the previous 48 hours, after Mr Swinney failed to rule out a new currency during an interview and threatened to keep the pound without an agreement with the UK.

The Scottish Government has claimed the currency union is a common sense plan in the best interests of both an independent Scotland the rest of the UK.

Ministers insist the UK would readily agree because North Sea oil would boost the new sterling zone's balance of payments.

Mr Swinney said: "What the Treasury's paper is designed to do is to make things sound as difficult and obstructive as possible. I don't think it is a helpful contribution."

He said there was nothing to stop an independent Scotland using the pound outside a formal sterling zone in a move which would "liberate" the country from taking on a £125 billion share of the UK's national debt.

Accusing the Chancellor of "playing with fire" he said: "We are interested in a rational and considered discussion."

Economist John McLaren, of the CPPR think-tank based at Glasgow University, said it was "most unlikely" the UK Government would refuse to negotiate on a currency union if Scots vote Yes in next year's referendum.

He added: "If the Scottish Government wanted a currency union it could get it, but on what terms?"

Alistair Darling, the former chancellor and head of the pro-UK Better Together campaign, called on the SNP to spell out its plan B in case a currency union could not be agreed.

He said: "If the rest of the UK won't enter into a currency union or if the terms are unacceptable to Scotland then the likelihood is that we will end up with a separate currency from the rest of the UK."

Last night, former Liberal Democrat leader Charles Kennedy said the SNP's position showed how "ill-prepared and ill-informed" the Nationalists were.