The Tanaiste, Ms Harney, has warned that the Government cannot afford to grant what she described as "a special pay deal" to any one group of workers which would lead to every other interest group in the State demanding similar conditions.

The Tanaiste has said that if nurses were granted a special pay deal, each 1 per cent increase would represent £60 million in extra Government spending.

Ms Harney's comments in Cork yesterday drew an immediate response from the Irish Nurses' Organisation, whose general secretary, Mr Liam Doran, warned that her effective dismissal of what the INO considered a legitimate pay claim by its members could lead to deferred industrial action being reactivated.

He said this question would be decided at a special meeting of the organisation next month.

Ms Harney said that little more than 10 years ago, the State was on the verge of bankruptcy with a high national debt, high unemployment and soaring taxes.

She added: "I want to confirm that the continuation of partnership and the negotiation of a new three-year national agreement are central to this Government's social and economic strategy . . . with a little goodwill on all sides, we can build a new partnership that will take us into the first decade of the new millennium."

However, Mr Doran described Ms Harney's views on pay rises as disappointing and disturbing. He said they showed a misunderstanding on the Government's part of what the Commission on Nursing was all about.

The nurses won support for their position yesterday from the former minister for health, Mr Michael Noonan, who accepted their understanding of the 1997 agreement. He said that the Nursing Commission had been set up as part of an interim settlement of the nurses' dispute. ail to the implementation of the Nursing Commission's recommendations and he was now clearly acting "in bad faith". The Minister was "handling the pay elements of the Nursing Commission recommendations very, very badly", Mr Noonan said. Meanwhile, Ms Harney ruled out any question of an agreed Government candidate in the forthcoming by-election in Cork South Central. The by-election, caused by the death of Fine Gael's Mr Hugh Coveney in a cliff accident last March, would be fought by the Progressive Democrats as a single entity.

She also said that the next Budget would offer generous tax cuts, addressing the needs of lower-to-middle income workers.