The European Commission has taken the unprecedented step of recommending that Ireland should be formally censured for pursuing economic policies inconsistent with agreed European guidelines.

Despite last-minute arguments by Ireland's Commissioner Mr David Byrne, the Commission yesterday asked EU finance ministers to issue a "formal recommendation" that the Government should change its policies.

The Government strongly rejected the Commission's criticisms last night, with the Tanaiste, Ms Harney, saying Ireland's policies "deserve applause, not reprimands".

After a two-hour discussion, the Commission rejected a draft proposal that called on Ireland to reverse specific measures in last month's Budget, calling for new wording that showed more sensitivity to Irish political concerns.

The Economic Affairs Commissioner, Mr Pedro Solbes, said Ireland had ignored repeated warnings to use budgetary policy to control overheating in the economy and that December's budget was in clear breach of the EU's broad economic policy guidelines.

"Budgetary plans for 2001 are expansionary and pro-cyclical and are therefore considered inconsistent with these guidelines. They will add to the overheating problem rather than abate it," he said.

Fine Gael yesterday echoed the Commission's view that the Government's budgetary policy was "putting economic prosperity at risk", and said the Commission's action was "an international embarrassment". Labour blamed Mr McCreevy's top rate tax cuts for incurring "the wrath of the Commission".

The Commission's proposal will be discussed next week by EU treasury officials. The final decision on whether to issue a "formal recommendation" will be taken by EU finance ministers on February 12th.

There is no concrete penalty for straying from the EU's broad economic policy guidelines. Mr Byrne told his colleagues on the Commission that it was important any censure of Ireland should not promote anti-EU feeling in the State. Mr Solbes yesterday acknowledged Ireland's economic success and welcomed structural reforms. But he said the arguments advanced by the Minister for Finance in Brussels last week were not enough to change the Commission's mind about the danger of overheating.