A former director of the Bank of England yesterday warned against Britain joining the euro, saying the single currency was punishing countries within the euro-zone.

Sir Martin Jacomb, ex-chairman of Prudential and current chairman of manufacturing company Delta, told a committee of MPs the euro was flawed because countries with differing economies such as Germany and Portugal could never entirely converge.

However Mike Rake, international chairman of accountancy firm KPMG and a member of the pro-euro lobby group Britain in Europe, told the Treasury select committee Britain was losing out by not being in the euro, which was boosting trade in the euro-zone.

MPs on the committee are conducting an inquiry into the UK and the euro ahead of the outcome of the Government's assessment of the five economic tests, expected this summer.

Sir Martin, a director of the Bank of England between 1986 to 1995, told the committee: "You will either impose too high an interest rate on a successful economy, like Germany, or too low an interest rate on those prone to inflation, like Portugal, or both." This would lead to falling employment and diminishing economic activity.

Mr Rake told the committee: "The risks of not going in outweigh the risks of going in. Whether or not it is a good idea to have the euro, the euro is a reality. It is there and it is something we have to deal with."

Shadow chancellor Michael Howard said: "Britain needs a currency that works for the British people.

"By keeping our own currency we can set interest rates in the interests of the British economy and British jobs."