Euro membership could threaten Britain's prized labour market flexibility, according to the government documents released on Monday morning.

The Treasury's background study on the single currency and employment protection concluded that recent progress would be put at risking by signing up to European Monetary Union.

A document published by Gordon Brown's department hailed the improvements "in the functioning of the UK labour market since 1997", the year that Labour came to power.

Overall unemployment, long-term joblessness and regional employment blackspots have all declined, the study says.

Both economic stability and growth and the "institutional framework" of the tax and benefits system are found to have increased the dynamism of the UK's labour market.

Brown has long been championing his reforms - such as the New Deal, tax credits and a light regulatory touch on employers - as examples to be adopted throughout the eurozone, which he sees as over-burdened with benefits, trade union rights and jobs taxes.

And the chancellor fears that adopting these practices in Britain would put this hard-earned position of strength under threat.

The document says that "more progress is needed to advance the government's long-term goal of employment opportunities for all" rather than any moves to take a backwards step.

Improving wage flexibility, whereby rates of pay of are varied around the country to take account of differentials in the cost of living, is a further key aim for Brown.

Yet such a move could be "severely tested if the UK decided to join EMU" the report concluded.

The single currency requires many of these issues to be harmonised to create a level playing field for European businesses.

Joining would therefore lose Britain a key competitive advantage against "larger EU economies" such as France and Germany, where progress "has been slower and starts from a weak position in terms of unemployment and employment levels".

Striking a more positive note, the report does confirm that Britain's minimum wage would not be affected by EMU and that "improved labour market flexibility will also enable the existing and prospective euro area members to better reap the potential benefits".