The justice minister, Lord McNally, has said he told the billionaire Barclay brothers that the UK would not let them turn the tiny Channel island of Sark into a "company town" as a poisonous row between the tycoon twins and local people threatens to break the island's antiquated system of government.

The unprecedented government intervention comes after 15 years of sporadic feuding in Britain's smallest crown dependency jurisdiction which has pitched many of Sark's 600 inhabitants against the reclusive businessmen Sir Frederick and Sir David Barclay, who live in both Monaco and a mock-gothic castle they have built on the 32-hectare (80-acre) island of Brecqhou, 200 metres west of Sark.

McNally, who conducted a whistle-stop tour of the crown dependencies this month, took the unusual step of holding an open town hall meeting in Sark. He said he heard from some Sarkees grateful for the jobs and investment that the Barclays had brought to the island. But the justice minister said others had raised concerns with the ministry about the behaviour of senior Barclay representatives on Sark, mainly their chief lieutenant on the island, Kevin Delaney.

Asked if he felt Delaney's actions were intimidatory, McNally said: "I invite you to look at the Sark Newsletter [a weekly mailshot to almost all households produced by Delaney]. I deplore the tone of the newsletter because I don't think it's constructive to the mood of tolerance I'd like to see on the island … A number of people have said to me that it was the sustained nature of attacks in the Sark Newsletter that made them withdraw from public life."

Those featured in the newsletter include the island's postmistress and its doctor. The latter resigned in February and calls the newsletter a "dangerous propaganda sheet". Some of those who fight back against attacks in print claim that they then receive menacing legal letters from lawyers.

McNally, the government minister responsible for managing the UK's relationships with the crown dependencies, told the Guardian: "One of the things that I've got to keep in mind is if Sark was in the hands of a single company or a set of individuals, would that be a threat to governance? I do not think the British government could simply accept such a state of affairs.

"The Barclays have never said that they plan to take over Sark, but I do not believe it would be compliant with our responsibilities [to ensure] good governance to allow Sark to become a company town. And I've said this to the Barclays."

Despite the minister's efforts not to take sides in the bitter Sark feud, his views sparked an angry response from the twins. Through their lawyer they said: "Lord McNally is poorly informed and has consistently and blindly sided with [Sark's] establishment without, apparently, ever asking himself what sort of political system he is supporting.

"It is, quite frankly, bizarre that the UK government should spend so much time and money, particularly in the present economic climate, defending the indefensible."

Many on Sark who spoke to the Guardian say they fear for the island's future as the reclusive Barclays – best known as owners of the Telegraph newspaper titles and the Ritz hotel – have snapped up almost a quarter of the island's land and many of the key businesses.

The economic colonisation, which the Barclays have admitted is unlikely to generate a return for them, comes amid years of costly legal challenges that they have brought over the archaic constitutional relationships between Sark, Brecqhou and the British crown.

McNally's recollection of his meeting is disputed by Sir David Barclay, whom he met, at the minister's request, 18 months ago. Barclay said the subject of Sark being dominated by a single interest had not been raised.

Whatever his discussions with the Barclays, McNally noted his powers to intervene in Sark affairs were constitutionally limited. Sark is the smallest of five self-governing crown dependency jurisdictions – the others are the neighbouring Channel islands of Jersey, Guernsey and Alderney as well as the Isle of Man in the Irish Sea.

McNally has expressed confidence that the Barclays would not want to attract a bad reputation through their behaviour on Sark: "One of the things I think is interesting, which I can't answer, is exactly what the Barclays are at," he said. "There is a matter of reputation here. And if, reputationally, they are willing to defend their role and their intentions – fine, let them do so."

McNally stresses his priority was to press for governance reforms in Sark in the interest of resolving differences fairly.

Meanwhile, the Barclays continue to kick back at hostility from many local Sark residents, characterising it as the behaviour of a "feudal establishment" clinging to political power. Their critics, they claim, have led a "culture of bullying and intimidation" on the island.

The Barclays are not responsible for the newsletter but insist it has played a vital role in pushing for modernisation in Sark. "The tone ... is proportionate to the importance of the reforms and the intransigence of the feudal establishment. Those engaging in public life must expect to have to deal with challenge and scrutiny."

Amid the backbiting, however, the Barclays have consistently put pressure on Sark's tiny parliament, known as the Chief Pleas, over various issues. Relations worsened when Sark's first democratic elections in 2008 – pushed for by the Barclays – failed to return Delaney or any of the candidates endorsed by the brothers. Afterwards, Barclay family businesses on Sark were temporarily shut down and staff let go.

Through their lawyer, the Barclays explained their take on the episode. "The people of Sark appeared to have just voted very clearly against the investment and jobs brought by my clients to Sark but then protested even more vigorously at these events [the business closures], which was, on the face of it, entirely inconsistent." They added that no one suffered financially as a result.

Offering his own reflections, McNally said: "They can give and they can take away. If the people of Sark say 'if the price of Barclays' investment is compliance – and we do not want that,' then they have the right to say that." But he has advised that the best course to defend the interests of all within Sark was to "put in place robust democratic structures that prevent the abuse of economic power".

He warned that this would come at a cost likely to force Chief Pleas to consider greatly revising its low-tax model. "I would hope that they see the price tag is worth paying. Democracy doesn't come free, but it does give protections."

The Barclays insist they too are supportive of the changes to governmental structures backed by McNally after an independent review of Sark's very limited machinery of state.

* Read the Barclay brothers' full response to the Guardian's questions about Sark here