The chancellor's five euro tests were designed to discover whether a "clear and unambiguous case" can be made for British membership of the euro.

They came under the headings of convergence, flexibility, investment, financial services and employment.

On the first test of convergence, Gordon Brown said there must be "sustainable convergence between Britain and the economies of a single currency" before euro entry can proceed.

This test was not met although there were "grounds for optimism" as "significant progress has been made".

British interest rates are higher than on the continent because of "structural differences remain" in the housing market.

But policies since 1997 have contributed to meeting Maastricht criteria for convergence and are "leading towards the sustainable convergence and flexibility required by the five tests", the chancellor said.

Brown said the key issue was structural convergence.

"We do not know whether shocks will occur, but there are risks for the UK," he said.

"We must be sure of sustainable convergence."

But he said the issue of price inflation and volatility in the housing market had been a problem under governments of all parties.

To counter the difficulties, the government will bring forward proposals to increase stability in the sector.

In his statement the chancellor announced that interest rates were higher in the UK than in the euro area because of house prices.

But Britain was moving towards convergence, he claimed, citing evidence that the economy had met the original Maastricht criteria for euro entry every year since 1997 and long term interest rates were converging at around four per cent.

The value of the euro had also stabilised against the dollar in recent months, bringing it closer to a suitable rate of exchange for entry.

The government also examined "whether there is sufficient flexibility to cope with economic change".

Again this test was failed, but the government promised to continue to push for measures to increase labour market flexibility.

And the chancellor will also urge his European counterparts to allow greater fiscal flexibility.

There will be consultations on the case for an "open letter system" on fiscal policy to ensure that tax and spend decisions are fully transparent and accountable.

The Treasury would send a letter to parliament when the economy diverges from key targets.

The "effect on investment" was a further hurdle that had to be cleared before Brown would formally suggest British membership of the euro and again this was failed.

"[Euro] membership would boost investment in the right circumstances," the chancellor claimed.

And he added that "there can be confidence" that these circumstances were on their way to being achieved.

"Subject to the achievement of sustainable convergence and sufficient flexibility, the tests for investment and employment would be met," he said.

The government would also aim to ensure Britain remains a "magnet" for inward investment, Brown pledged.

The chancellor's fourth test concerned "the impact on our financial services industry". He ruled that it had been met - the sole test to achieve this status.

"The assessment shows that in or out of the euro UK financial services, wholesale and retail, are and will remain competitive," Brown told the Commons.

"Future integration of financial markets inside the euro could promote the kind of diversity, flexibility and risk diversification seen in the capital markets of the USA, making it easier for a more flexible Britain to win business throughout the euro area."

The final test concerned whether British membership "is good for employment". Again this wasn't met - but, like investment, could be "subject to the achievement of sustainable convergence and sufficient flexibility".

"The potential benefits in increased trade and competition and then higher long-term levels of output and employment are significant," Brown told MPs."Without sustainable convergence and sufficient flexibility, we would not realise the potential benefits for stability, jobs and investment."