Iain Duncan Smith: "All about money"

He said the proposals sought to separate the functions that could be developed best "within a PPP" and those the government was better able to carry out.

"Around three quarters of DERA would be turned into a company which we would hope to float on the stock market as soon as its potential is judged to be suitably developed."

Mr Hoon did not give a figure on how much DERA could be worth on flotation.

Earlier, shadow defence secretary Iain Duncan Smith said any sell-off could enrage the UK's allies in the US who would be concerned about the national security implications of privatisation.

He said that a break-up of DERA would be very problematic.

"DERA has a huge impact on national security, because the work they undertake has a bearing on future defence equipment, much of it very, very secret equipment used by government and the defence services."

The Tory spokesman said any sell-off would be "all about money for the Treasury" after the defence budget was cut by �800m a year .

"The government is scratching around for money," said Mr Duncan Smith.

"They really care nothing at all about the effectiveness of our armed forces. This is all about damaging defence yet again."

'Compromised'

Labour chairman of the Defence Select Committee, Bruce George, said the all-party group had twice produced reports condemning plans to sell off parts of the defence research establishment.

He said: "We feel that DERA as presently constituted is capable of delivering the goods.

"Sir John Chisholm, who is in charge, has done wonders and we believe he could do further wonders, but within a looser structure and not semi-privatisation.

"I don't think the organisation should be split up. The co-operation which has for many years been so strong with comparable organisations in the US might well be compromised."

Committee members met senior US officials last summer and were told that, while Washington would not seek to intervene in any sell-off, it would have a series of consequences, said Mr George.