Gordon Brown says he favours euro membership in principle
Key economic tests for ditching the pound and joining the euro have not yet been met, Chancellor Gordon Brown has told MPs.
Mr Brown said the government would report back on progress towards meeting the tests in the Budget next year - and then decide whether to assess the tests again.
He said a referendum bill would be unveiled in the autumn to pave the way for a possible referendum next year.
That means the government has left the door open to take the issue to the country before the next general election.
The UK's five tests
NOT MET: Convergence with eurozone
NOT MET: Enough flexibility to adapt
NOT MET: Impact on jobs
MET: Impact on financial services
NOT MET: Impact on foreign investment
The chancellor revealed the government's verdict on UK membership of the euro in an historic statement in the House of Commons.
He said four of the five Treasury tests on the currency had yet to be met.
But he said progress on passing two of the tests - on economic flexibility and convergence with the eurozone - would lead to the remaining two tests being satisfied.
The chancellor said it was vital the decision - one of the "most momentous" ever taken - was made "in the British national economic interest".
But the Tories derided the announcement, with shadow chancellor Michael Howard saying the tests had been "drawn up on the back of an envelope".
He said the statement was the "result of the frantic efforts by the chancellor and the prime minister to cover up their differences".
Mr Brown set out the potential benefits of joining the euro, such as a growth in national income, delivering higher living standards and lower prices.
But he warned that joining at the wrong time could see unemployment rise, see cuts in public service spending and stall economic growth.
Soon after Mr Brown's statement, Prime Minister Tony Blair began a round of telephone diplomacy, explaining the decision to nine fellow world leaders.
Earlier on Monday, the Treasury published 1,800 pages of documents examining the impact of euro membership on the UK economy.
They indicate that the Treasury has concerns over Britain's greater sensitivity to interest rate changes than the rest of the eurozone, in no small part because of the level of mortgage debt in the UK.
But Mr Brown said they also showed that trade between Britain and the eurozone could increase by up to 50% over 30 years if the single currency was adopted.
The chancellor set out other potential advantages of joining the euro, such as lower interest rates, less exchange rate volatility and lower transaction costs for business.
But he said all the five economic tests must be met before the UK joined the euro.
He said the convergence test on bringing the UK economy more into line with the eurozone had not been met because of two risks for Britain, from housing and from inflation.
He said there was a need for further reforms of the UK housing market to tackle instability.
And he said the government would also review its inflation targets as part of efforts to meet the test on convergence between the UK economy and the eurozone.
He said the Bank of England would be told to change the current inflation
target of 2.5%, and that a new Europe-wide measure of inflation would be used.
Mr Brown said there were "grounds for optimism" that the convergence test could be passed.
On the second test, the need for flexibility in the UK economy to adapt to the eurozone, "considerable progress" had been made - but not enough.
He said there was hope of meeting the other tests, on jobs and investment.
And he said one test - on the potential effects on the financial services industry - had been met. He said the City of London would remain competitive inside or outside the eurozone.
Mr Howard said the announcement was "an exercise in deceit" with Mr Blair and Mr Brown "united in rivalry".
"This is not the end of the beginning for this government, it is the beginning of
the end," he said.
"This is the government which
promised to prepare and decide but now it is not prepare and decide and it is
not even wait and see, it is just hope and pray."
Lib Dem spokesman Matthew Taylor said the announcement had done nothing to clear up the euro issue.
"The time for indecision is over, warm words are not enough," he said.
But Simon Buckby, campaign director of the pro-euro lobby group Britain in Europe welcomed the decision to leave the way open for a referendum next year.
He said the announcement was a "decisive defeat for anti-Europeans".
But Nigel Smith, chairman of the No Campaign said the referendum paving bill was a "token statement of intent".
He said the reality was opposition to the euro was increasing.