The European Union's decree is the latest in a series of setbacks which threaten to derail Minister McCreevy's initial projection of an 837m euro budget surplus. It comes on top of an expected 500m euro shortfall in tax returns and a dramatic downturn in the economy.

The ruling from the EU's statistical office, Eurostat, means old money not returned or converted to euro cannot be used to offset deficits when the Government's books are being balanced.

Last night, the Minister's spokesman said he was not surprised by Eurostat's decision and that a surplus was still on the cards.

However, the Eurostat decision is the death knell for Mr McCreevy's hopes of recording a budget surplus, according to a leading economic analyst.

Colin Hunt of Goodbody Stockbrokers said despite Mr McCreevy's efforts to rein in public spending, it was inevitable a budget deficit would be recorded. Using a one-off windfall to balance the books was not sustainable, Mr Hunt said, as you could not plan for the future by including funds of this nature.

Tánaiste Mary Harney backed her Cabinet colleague saying she did not believe the ruling would mean trouble for Mr McCreevy. Budgetary targets would be met by cutting back on unsustainable public expenditure, Ms Harney said.

But Labour finance spokesman Brendan Howlin said the ruling confirmed the budget was a sham and the Government's election campaign was being exposed as a web of dishonesty and deceit.

Fine Gael enterprise spokesman Phil Hogan said the Eurostat decision had shown up Mr McCreevy's attempts, prior to the election, to gain public confidence in his ability to competently run the economy.

The economy took another heavy hit yesterday as almost 1.5bn euro was wiped off the value of Irish shares yesterday. The ISEQ index of shares has been devalued by almost 3bn in the past month.