Top brass force Brown to review £1bn defence cuts - while Gurkhas hand back medals in protest of 'immoral discrimination'

The chiefs are understood to have said that cuts ordered by the Prime Minister threatened to undermine current operations in Iraq and Afghanistan and the future viability of the forces.

At least two senior officers, believed to be Army generals, have threatened to resign - according to several sources.

The crisis comes as crowds of Gurkhas descended on Parliament today to watch 50 veterans hand back their medals in protest at their "immoral discrimination".

Prime Minister Brown is reported to have agreed to a defences review, according to a senior defence analyst, provided it is not called a defence review, and instead called a "defence capability review".

The compromise comes after a series of high-level meetings at the Ministry of Defence to discuss how to cut £1.1 billion from this year's defence equipment budget, which is currently at about £12 billion.

The defence chiefs and central MoD staff examined some 80 projects, including the 19 large strategic equipment programmes, which include the £3.9 billion programme for two new 60,000-ton aircraft carriers, and the £23 billion procurement of the Typhoon-Eurofighter for the RAF, which is 15 years late and still suffering problems.

Plans to send a new fighter-bomber variant of Typhoon into action in Afghanistan this summer have been shelved because this type of plane is not even in production yet.

The chiefs of staff have drawn up several sets of proposals for cuts, but senior civil servants and politicians have rejected them.

Two important meetings at the end of February and in the first week of this month brought no agreement - so the chiefs explained to Defence Secretary Des Browne that they were being asked to do the impossible.

A senior defence industrialist said: "The programmes were being looked at on purely financial grounds with little regard to their relevance to current operations and future strategy."

Fifteen years too late: Britain's Typhoon-Eurofighter has been beset by problems amid defence budget cuts

Frustrated at the lack of progress, the chiefs invoked their constitutional right for a personal interview with the Prime Minister, for which they usually put on uniform, to underline the gravity of the occasion.

It was after this meeting last week that Mr Brown said he was prepared to consider a defence capability review which would report by June.

The study would look at what Britain can get for its present defence budget of around £33.5 billion a year.

The budget is due to rise by 1.5 per cent over the next three years under last year's Comprehensive Spending Review, which was drawn up by Mr Brown in his last days at the Treasury. This figure is well below inflation.

According to defence analysts and former defence chiefs a capability study is bound to conclude Britain cannot afford the present level operations in Afghanistan and Iraq with the present budget arrangements.

"The Government will find it has to provide more money for defence, or make serious and very painful cuts," a former defence chief warned recently.

The cuts are likely to annoy allies, and hit jobs in key Labour constituencies. Among the programmes already under discussion are the Future Lynx light helicopter and cutting back the orders for the third tranche of Typhoon for the RAF from 88 to below 20.

Gordon Brown and Des Browne have so far said that the project to build two aircraft carriers should not be cut. They would ensure thousands of jobs in yards on the Clyde and at Rosyth.

There were emotional scenes during today's protests at Parliament when 50 retired Gurkhas gave their Long Service and Good Conduct medals to Liberal Democrat leader Nick Clegg, who will pass them on to Prime Minister Gordon Brown.

Nepalese Gurkhas have been part of the British Army for nearly 200 years, but they are unhappy that they receive lower pensions than UK soldiers.

If they retired before 1997, Gurkhas have no automatic right to remain in the UK.

Mr Clegg told the crowds: "When I told people what you get from the Government in return for the years of brave, loyal, uncomplaining success people simply don't believe it.

"It is quite simply a national disgrace. I am simply saying you should be treated with the respect and honour you deserve as brave soldiers

"I will do everything I can to end this unacceptable and immoral discrimination."

He said he would raise the matter personally with the Prime Minister.

Damber Ghaly, chief coordinator of the protest for the Gurkhas United Front, handed back his six medals, including his MBE.

The 50-year-old who served in the Gurkhas for 28 years, said: "It is very sad and emotional but I think it is the only thing we can do. I served in Kosovo and Bosnia where I was in charge of my troops.

"It is not a case of being angry but we feel very disappointed and let down."

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