A devastating portrait of the political and personal rivalries between Tony Blair and Gordon Brown, the two most powerful men in Britain, is revealed in today's Observer.

In the definitive account of their relationship during New Labour's first term in office, Andrew Rawnsley, this newspaper's chief political commentator, discloses in a new book that the Prime Minister and his Chancellor have regular raging arguments, which have threatened to derail the Government's most important policies.

The book, Servants of the People, serialisation of which begins today, says that the relationship between the two would often descend into petulant battles over who had the greatest authority. Blair and Brown both vied for the Labour leadership after John Smith died in 1994.

Rawnsley, who was given unprecedented access to senior officials and Ministers in government, reveals that the feuding extended to Blair being left in the dark by Brown over sensitive issues, such as the euro and the Budget. Supporters of both sides - Blairites and Brownites - would stoop to anything to beat the other camp.

The Prime Minister would shout in frustration at the way Brown operated and often explained Brown's mode of working with psychological theories, saying once that 'Gordon's problem is that he does not have a family'.

The book throws new light on the deep faults and brooding tensions at the heart of the New Labour Government and for the first time exposes the true scale of the divisions between Blair and Brown, which officials have hitherto tried to deny.

Ahead of publication, Labour officials signalled their concern that such a public airing of the most damaging details of the two men's relationship will undermine the New Labour image, which is being carefully constructed ahead of the party's conference in a fortnight.

The book reveals that:

• Brown wanted to sack the Governor of the Bank of England, Eddie George, in 1997 because he saw him as a threat. Blair had to telephone George personally to make sure he remained in post and prevent the markets collapsing.

• Blair often lost his temper with Brown's plotting and manoeuvring, saying 'God, Gordon can be impossible' and exploding: 'Jesus. What has Gordon done now?'. He said the Chancellor was often un-cooperative.

• On a fundamental change in policy on the euro in 1997, Blair was left completely in the dark and had to have Brown's new policy read over the phone to him from an article in a newspaper.

• Brown threatened to resign earlier this year over a pro-euro speech by Peter Mandelson, the Secretary of State for Northern Ireland, who has fallen out repeatedly with the Chancellor.

• Blair and Brown rowed over increases in health spending after the Prime Minister announced on a Sunday morning television programme that Britain's health bud get should be brought up to the European Union average. Brown was so furious with the Prime Minister he shouted at him: 'You've stolen my f****** Budget.'

• Blair was so angry with Brown's one-time chief press spokesman, Charlie Whelan, about pro-Treasury briefings on Government policy, that he repeatedly said he would force him out. When he failed to do so, Blair became an object of ridicule among his own senior aides. Whelan was finally forced out by Blair after details of Mandelson's home loan from Paymaster General Geoffrey Robinson became public.

In a disclosure that will infuriate the Blair camp, the book reveals that Brown is unimpressed with the Prime Minister's economic abilities and always knew he could beat him in an economic argument. 'Tony wants to tax less, spend more and borrow less,' the book quotes Brown as saying. 'Our job is to make it add up for him.'

The book, which is meticulously sourced at the highest level, also deals with the row over leaks about Brown's 'psychological flaws' - a comment Rawnsley says was made by someone 'with an extremely good claim to know the mind of the Prime Minister'.

Although Rawnsley does not reveal who made the comment, he does rule out Mandelson, who some blamed at the time. The book makes no comment on allegations that Alastair Campbell was the source, something that has been strenuously denied by the Prime Minister's official spokesman.

It does say that Brown, who confronted Blair about the remarks which he believed had come from someone in No 10, believed Blair was lying when he said he did not know who made them.

The book says Brown has harboured a burning resentment about the remarks ever since.

Brown's desire to get rid of the Governor of the Bank of England, who is still in position, will shock the markets. Brown wanted to give independence to the bank, a move he bounced on Blair in the first few days after the general election.

Blair supported the move, but did not know that Brown wanted to act immediately. Brown thought that George could be disloyal.

The most remarkable revelation centres on Government policy on the euro, which the book reveals descended into a shambles during 1997. Brown decided, after a five-minute phone call with Blair, that the policy needed to be 'clarified' in an interview with the Times political editor, Philip Webster.

The story was spun to suggest that Brown ruled out membership of the euro for the lifetime of the parliament, one of the most important Government statements on Europe since the general election.

Blair was unaware that Brown was going to make such a significant move and was stranded at his country home, Chequers, when the Times article was published.

The first the Prime Minister knew about the fundamental shift was when Mandelson rang him and read out the article.

Blair was furious but when he tried to contact Brown and Campbell, both had gone incommunicado. With his own press secretary having gone missing, Blair was left to telephone Whelan, who was briefing journalists about the policy change on a mobile phone outside a pub.

Nor have relations improved between Blair and Brown. The book reveals that the rows between the two men have infected the whole history of the Government up to the present.

Brown wanted to make a big announcement on health in the Budget last March but a flu crisis in January and criticisms about standards in the health service by New Labour peer Professor Robert Winston meant that Blair wanted to say something positive earlier in the year.

In an interview on Breakfast with Frost he made the European Union cash pledge. Brown was angry that the centrepiece of his Budget had been revealed and also that the amounts being talked about (£16 billion) were so high when he had yet to make a final decision.

In a further twist to the levels of discord in government, the book also reveals that Mo Mowlam turned down the post of Health Secretary in her bid to become first Foreign Secretary and then Defence Secretary.

Mowlam, who announced last week that she was resigning, then offered to fight Ken Livingstone for Mayor of London, even though Frank Dobson was already the official Labour candidate.

However, it is the disclosures about Brown and Blair that are of greatest interest. Rawnsley explains the remarkably fraught relationship between the Prime Minister and the Chancellor with reference to Brown's failure to become Prime Minister.

'The itch that Brown could not stop himself scratching was the smouldering resentment that Blair had taken the first prize of politics,' the book says.