ALAN Milburn has made a surprise attack on Chancellor Gordon Brown's flagship policy for helping the worst-off - warning that it risked creating a new poverty trap.

The Darlington MP and former Cabinet minister said the tax credits system, which boosts the income of the low-paid, failed to ensure hard work was "rewarded, not penalised".

It failed on "fairness grounds" because the low-paid lost far more of any extra income in tax than the rich, Mr Milburn said during debate on the Budget.

He called instead for a lower starting rate of tax to "spring more people from the poverty trap" - a policy rejected by the Chancellor last week.

The speech, Mr Milburn's first in the Commons for more than a year, was immediately seen as a direct attack by one of Tony Blair's closest allies on Mr Brown's extension of means-testing.

It coincided with similar comments by Mr Milburn's fellow Blairite, former trade secretary Stephen Byers, who warned greater means-testing was not "a long-term solution".

The Prime Minister is reported to have clashed with Mr Brown over more means-testing of pensions, through the pension credit, ahead of last week's Budget.

Mr Milburn's attack is unusual because Labour MPs in the North-East and elsewhere have been united in hailing tax credits for transforming the lives of poorer people.

The Treasury issued a withering response, noting it was not its "habit to respond to statements made by backbench MPs".

Mr Milburn, touted by some anti-Brown MPs as a rival to succeed Mr Blair, praised the Chancellor's policies for halting the widening of the gap between rich and poor under the Tories.

But he said: "The truth is, however, that the gap remains stubbornly and persistently wide. While more people are better off, poverty has become more entrenched."