John Monks is today warning that opposition to the government's public service reform plans exposes an ideological divide at the core of the Labour Party.

Singling out education as a key battleground, Monks, who slams Downing Street for its lack of clarity, argues that the disagreement is over policy not presentation.

"It is about policy. Except where both the policy and presentation are not clear. It's like the dance of the seven veils, and its not unveiled yet. No one knew anything about air traffic control in the 1997 election - did they?"

Monks argues that the government still appears unclear on whether its plans are finalised or whether Downing Street is flying kites on its proposals to hand over the operation of key public services to private firms.

In recent days, ministers, led by Alan Milburn and Stephen Byers, have admitted that the government has mishandled the announcement of Labour's plans and played down the possibility of wholesale privatisation of public services.

Monks argues that the future of public service reform will become a litmus test for Tony Blair - saying the plans have generated a "stronger reaction from the party and the union... than to anything".And he warns that the issue will not go away. "It will be the test of whether the government can listen or whether it's going to plough on and be tough with its own side and hope that it plays well in middle England," said Monks.

The TUC chief believes Blair's election speech - in which he pledged sweeping reform "to the tradition of monolithic, centrally driven public services" - has triggered deep suspicion amongst trade unionists. "The fear is that the private sector has the inside track," says Monks.

The debate over public services, says Monks, is linked to a wider ideological contest between the European "social market" model and the north American free market economy.

"This is the new ideological argument. It's not as exciting as capitalism and communism and does not arouse that kind of passion. It is a minority argument and we need to make it a much more popular one. The difference between the social partnership approach and the American deregulated liberal markets approach is huge."

Monks admits more must be done before trade unions win the argument. "Much of what we do is trying to establish this European model here and we have yet to win the argument intellectually or ideologically with the government - nor have we lost it. These things keep creeping through," he said.

Whilst Monks admits that the unions are deeply uneasy about the direction of policy, he remains committed to fighting his corner from within. "We're not happy but we're not marginalised. We're in the field and we have a lot of allies in the Labour Party. The fact is that Labour are massively in power, they won a huge victory and at the moment the real politics that matter is in that area."

Signalling that there are ministerial divisions on PPP, Monks singles out the "public first" approach of health secretary, Alan Milburn, as the preferred trade union option.

He believes that education will become the most prominent issue of disagreement over coming weeks. "Education is an area where there has been this private/good, public bad and there is quite a big incursion of the private sector already," said Monks.

To clarify the position in relation to the private sector and schools, Monks hopes that Blair will "rediscover cabinet government" and in doing so "avoid some of the mistakes" in current thinking.

"There are very considerable differences of emphasis. There is an ideological 'public first' theme in health, and I think the prime minister's probably on board with that. In other areas, education, I pick up a different ideological slant a sort of 'free it all up' let local initiatives take a hand."

Monks is warning Blair that "people are on the alert" and suggests unions are divided on how to respond to his approach. "Some say lets give him a whacking and others say lets see if we can do it more diplomatically," he says.

During a media briefing, Monks also underlined trade unionists' anger at the fact that thousands of manufacturing jobs are going to the wall at the same time as ministers are handing out generous foot and mouth compensation payments to farmers.

"We are keen to raise the profile of manufacturing. I have a lot of sympathy for those who say that the farmers are getting lots of help but manufacturing which is a far larger part of the economy is struggling and not getting much attention or help" he said.

The TUC boss is also calling for the government to put £1 billion into regional development agencies and beef up the role of the DTI in order to boost the flagging sector.