Chirac and Blair are discussing the euro and Iraq
Iain Duncan Smith has accused the government of adopting the previous Conservative administration's 'wait and see' policy on the euro.
The Conservative leader quoted Prime Minister Tony Blair's criticism of the John Major regime as "weak and divided" and said it was Labour that was now being buffeted by rival factions.
He said that the government's decision to look again at the euro in a year's time was a setback for British business which was now left without a clear view of how things would proceed.
But Mr Blair hit back accusing the Tory leader of wanting to withdraw from the European Union.
He reminded Mr Duncan Smith of his leading role as a Maastricht rebel when he repeatedly defied the Conservative Whip.
Now Mr Duncan Smith was in charge of the Tories it was a case of "the lunatics have finally taken over the asylum", said Mr Blair.
Mr Major lost power in 1997 after Labour's landslide victory
On Monday Chancellor Gordon Brown set out the reasons as to why the government believed that it was not in Britain's current economic interests to ditch the pound.
That was followed by both Mr Blair and Mr Brown talking up the benefits to the UK of eventual euro-membership at a joint news conference.
Ahead of prime minister's questions Mr Blair, alongside his chancellor, addressed Labour backbenchers.
It is understood they told MPs to get out and make the case for the euro.
On Wednesday evening the prime minister was in Paris having dinner with French President Jacques Chirac.
The meeting is being seen as a bridge-building exercise in the wake of disagreements over the war in Iraq.
And the two leaders were united in their condemnation of the suicide attack in Jerusalem, which killed 26 people.
After dinner, Mr Blair said: "The entire purpose of those who commit terrorist acts such as
these is to disrupt any possibility of peace and the response of the
entire international community has got to be unite, defeat the
terrorists and refuse to let them derail the possibilities for
Top of the agenda was likely to be next week's European summit in Greece, where the EU's draft constitution will be discussed.
Mr Chirac has already made a positive response to the way the UK government had handled the euro issue.
Mr Blair said a referendum on the currency before the next election was a "possibility" and that there was "a realistic prospect of progress".
Many euro-enthusiasts believe that the UK could now begin the process of joining and that the decision not to is more about politics than economics.
The prime minister said Monday's euro statement, promising to reassess the case for joining the euro next spring - marked a "definitive change" in the process by making clear the benefits of euro membership.
Mr Brown has said he and Mr Blair would work together to put the "patriotic case" for Europe.
A series of road shows is aimed at taking on the "myths and prejudices" about membership of the EU and the euro.
On Monday afternoon, the Conservatives reopened another front in their assault on the government's European policy in a Commons debate.
But their demand for a referendum on the new draft EU constitution was defeated in the Commons by 293 votes to 155.
During the debate, shadow foreign secretary Michael Ancram said Labour had held referendums on a range of issues, from devolution to Scotland and Wales to having elected local mayors.
"This government loves referendums, they have shown that again and again - until this one," he said.
"Why this one? What are they afraid of."
Former Labour minister Frank Field urged the Tories not to put the issue to the vote yet.
Waiting longer would mean Labour backbenchers became convinced their constituents wanted a referendum, he argued.
Foreign Secretary Jack Straw mocked what he said was a Tory "model leadership of zealots".
The crucial issues was not the current draft constitution but what was decided by European leaders at their Inter-Governmental Conference (IGC).
"The very best judgement we can make, I believe, that the outcome of the IGC will not fundamentally alter the nature of the relationship (between Britain and the EU)," he said.
Liberal Democrat foreign affairs spokesman Michael Moore said it was "crazy" both to call for a referendum or rule it out at this stage.
But there should be a vote if the final treaty meant "major shifts of control, such as the transfer of significant powers".