Labour has challenged Plaid Cymru to withdraw its threatened vote of no confidence in Alun Michael's leadership.

They say that it will harm negotiations with the Treasury and could plunge the Assembly into a period of instability.

Responding to a letter sent to the First Secretary by Plaid Cymru, Alun Michael gave his assurances that the "financial consequences of Objective One will be resolved by the UK Government's spending review in July - allowing Wales to draw down the full �1.2bn".

The First Secretary also said that for the coming financial year the National Assembly has "sufficient resources to cover all the grant payments which will be needed".

He said that �25m has been specifically earmarked for Objective One spending - a figure based on the "best possible estimates of what will be needed".

Plaid however have demanded an additional �85m.

He said that the onus is now on encouraging people with projects to come forward and develop them.

Alun Michael also gave a "categorical guarantee" that the Assembly will meet any grant claims made in 2000/2001 even if it is more than the estimated �25m already allocated.

Economic Development Secretary Rhodri Morgan said that this extra money would come from underspends in existing Assembly budgets.

But he categorically denied that money would be taken from the education and health budgets to meet any potential shortfall in match funding.

There is little doubt in the mind of Labour that they will be able to deliver the necessary amount of money to ensure that Wales maximises the benefit from Objective One.

'Fear and doubt'

Alun Michael said that Plaid have "campaigned to inject fear and doubt where none is needed".

He also said that "they are playing fantasy politics if they think they can force the Chancellor's hand by bringing down the Labour First Secretary".

On the issue of the vote of no confidence he said that if he lost he would stand again but would not be drawn on his long-term plans.

Plaid Cymru said that the stage is now set for a vote of no-confidence to go ahead.

In a statement Plaid said: " This is a deeply disappointing response to our letter. It is now clear that Tony Blair is letting Wales down."