Jacob Rees-Mogg is leading a Tory backbench Brexiteer revolt against Philip Hammond over his softening tone on quitting the EU.
The arch-Eurosceptic has demanded a fundamental shift from ministers on Brexit, saying moves toward “close alignment” were unacceptable.
It came as the Government was forced to clarify its position when the Chancellor delivered an eyebrow-raising speech at the World Economic Forum advocating a “very modest” approach.
Rees-Mogg, who as head of the European Research Group (ERG) has the backing of at least 60 MPs, was thought to be furious.
In his dramatic intervention, he accused negotiators of being “cowed by the EU” and said ministers should not regard Brexit as a “damage limitation exercise”.
Hammond, meanwhile, told business leaders in Davos, Switzerland, that he hoped the UK and EU will barely move apart and stressed they were already “completely interconnected and aligned”.
A Downing Street source later told reporters: “The Government’s policy is that we are leaving the single market and the customs union.
“Whilst we want a deep and special economic partnership with the EU after we leave, these could not be described as very modest changes.”
As tensions rose, Hammond also sought to clarify his words on Twitter.
But it has angered hard Brexiteers as speculation mounted of a potential leadership challenge to the Prime Minister.
One former minister, Andrew Percy, hit out at the Chancellor, reportedly telling him to “put a sock in it”.
People “did not vote for the management of decline”, said Rees-Mogg.
“They voted for hope and opportunity and politicians must now deliver it,” Rees-Mogg said.
Rees-Mogg said “really obvious opportunities” to improve people’s lives from Brexit were at risk, if a model similar to the EU’s single market and customs union is adopted.
This would leave the UK “divested of even the limited influence we current have”, he said.
UK negotiators, led by Brexit Secretary David Davis, must take a tougher stance, he said.
“For too long our negotiators seemed to have been cowed by the EU,” said Rees-Mogg.
“Their approach seems to be that we must accept what the EU will allow us to do and build from there. This is no way to negotiate and it is no way for this country to behave.”
Hammond, however, insisted the UK was not seeking an “off-the-shelf” model to replace its membership of the EU single market and customs union.
The starting point is a position of “high levels of bilateral trade in goods and services,” he said at the WEF.
“So instead of doing what we’re normally doing in the trade negotiations - taking two divergent economies with low levels of trade and trying to bring them closer together to enhance that trade - we are taking two completely interconnected and aligned economies with high levels of trade between them, and selectively, moving them, hopefully very modestly, apart.
“And so we should be confident of reaching something much more ambitious than any free trade agreement has ever achieved.”
Downing Street said May had used major speeches to talk about the “opportunities that Brexit will provide for the country”, and that the government was confident of securing these opportunities in the next phase of negotiations.
Asked whether she agreed with Hammond’s comments, the spokesman said: “The cabinet has signed up to the vision the PM has set out in her speeches.”