The chancellor has announced a significant increase in the budget for a war against Iraq.

Gordon Brown told MPs that he was increasing the contingency reserve set aside for the Ministry of Defence from £1 billion to £1.75 billion.

The chancellor also revealed that the MoD had already begun drawing on the funds. A further update on the costs of the Iraq crisis would come in next month's Budget, he added.

The increase in the contingency reserve comes after a leading think tank warned that the costs to Britain of a war with Iraq could hit £3.5 billion.

Defence secretary Geoff Hoon said last week that the government was prepared to go to war "irrespective of the cost" - a position backed by the chancellor.

"Nothing should prevent us from equipping and supporting our armed forces which provide a great service for Britain - as our security services do too," Brown told the Commons on Wednesday.

The government has already announced that 40,000 British troops are being deployed to the region ahead of a possible military conflict.

Forces are also being deployed to protect key British locations such as Heathrow amid growing fears of a terror attack.

A spokesman for the Treasury denied that the announcement meant that war was not inevitable.

"Following discussions, it seemed sensible to take prudent action by setting this extra money aside," he said.