EUROPEAN financial markets could be thrown into confusion today because of a serious row between the German government and the Bundesbank.

The row which threatens the future of European Monetary Union follows the Bundesbank's rejection of the government's plans to revalue its gold reserves.

The government planned the revaluation to allow Germany to qualify to become a member of the EMU in the first round.

The outlook for EMU deteriorated last night after the Bundesbank rejected the government's plans to meet the Maastricht criteria for entry to EMU by revaluing its gold reserves.

In a toughly worded statement the Bundesbank set itself on a collision course with Chancellor Helmut Kohl's government. The crisis triggered volatile conditions on financial markets with the deutschmark oscillating between strength and weakness against the dollar and sterling.

An unrepentant Mr Kohl - supported by senior political allies - swept aside the Bundesbank's protest. A statement issued by Mr Kohl, the Finance Minister, Mr Theo Waigel, and other Bonn coalition leaders made clear the government would go ahead with its plan to change the Bundesbank law and transfer part of an extraordinary gain from the revaluation of the gold reserves to Bonn this year.

Such a move would help to keep Germany's 1997 public deficit below the target of 3 per cent of gross domestic product laid out in the 1992 Maastricht Treaty and could bring Germany's public debt down towards the 60 per cent of GDP prescribed in the treaty.

The Bundesbank cannot prevent the government from changing the law to allow the gold revaluation. But analysts said the central bank could refuse to transfer the resulting gain to Bonn in the present calendar year, on the grounds that it has already made its annual profit transfer to the federal accounts.

After an unusually long meeting of its decision making central council, the Bundesbank said Mr Waigel's plan to revalue the gold "could be construed as an attack on Bundesbank independence".

It said the plan to use a capital gain from the gold revaluation this year to meet the Maastricht criteria did not conform with the planned rules old the future European central bank. It said such action could undermine the "credibility and stability" of the planned European single currency.

Mr Kohl and the other coalition leaders said there was no need to wait for 1999, when the ECB would have decided how to revalue the gold. Declaring it was "sensible and also responsible" to adjust the value of the gold now, they insisted the bank's independence would not be diminished.

Publication of the Bundesbank's statement came after a day of tension on financial markets. The Bundesbank was forced to break the news blackout surrounding its discussions to deny rumours that Mr Hans Tietmeyer, the Bundesbank president, was resigning.