Lord Mandelson, the business secretary, expressed regret yesterday after he became embroiled in a four-letter-word spat with the head of Starbucks, Howard Schultz, over the American entrepreneur's claims that the British economy was in a spiral of decline.

Mandelson was in New York to deliver a speech warning that EU member states faced a threat from competing bail-out programmes for different industrial sectors. But he became angered by Schultz disparaging the UK economy on a cable TV channel and was caught out swearing about the way the Starbucks founder dismissed the UK's economic fortunes.

Schultz claimed that Britain was in an economic spiral and said: "The place that concerns us the most is western Europe, and specifically the UK."

He said it had taken between a year and 18 months from the beginning of the credit crunch for consumer confidence to fracture in the US, but the deterioration had happened far more quickly in Europe once financial cracks appeared.

Asked about his biggest concerns, Schultz said: "Unemployment, the sub-prime mortgage crisis, particularly in the UK, and I think consumer confidence, particularly in the UK, is very, very poor."

Mandelson hit back on the same channel, saying Britain was "not spiralling, although I've noticed Starbucks is in a great deal of trouble - but that might be because of their over-expansion, given the state of the market."

Later, at a drinks reception, he escalated the rhetoric when he was overheard saying in what was intended as one of his trademark off-the-record asides: "Why should I have this guy running down the country? Who the fuck is he? How the hell are they [Starbucks] doing?"

A government source said yesterday that Mandelson regretted his language, but not the sentiment. British officials are becoming increasingly concerned that foreign economists and business leaders are exaggerating the scale of the downturn in the UK, leading to a potential collapse in inward investment.

As word of the argument spread across the Atlantic, Starbucks responded to Mandelson's comments by insisting that it was still committed to the UK.

"It is a difficult economic situation in the US and around the world. Please be assured that Starbucks has no intention of criticising the economic situation in the UK. We are all in this together and as a global business we are committed to each and every market we serve," a company statement read.

Mandelson said he regarded Starbucks' statement as in effect closing the issue.

His vigorous defence of the UK economy reflects alarm in ministerial circles about protectionism in Europe and the US. Hours after Mandelson's robust defence of Britain in New York, trade minister Lord Davies, speaking at a conference in Barcelona, also went on the attack by saying the UK was not losing its position as a financial powerhouse. "People who write off London as a capital markets centre - they do it at their peril," he said.

Mandselson is now heading the British government's communication drive on the recession, and wants to improve the UK's image abroad and communicate the message to British voters about government initiatives on mortgage help to homeowners and aid packages to business.

There are particular anxieties about congressional efforts to insert "buy America" provisions in the Obama administration's economic stimulus package - a move viewed by Britain, Canada and other top trading partners as naked protectionism.

Mandelson has been arguing that the government faces a special difficulty in trying to be honest with the public and the markets. He has admitted: "If you start speculating about the sort of scale of the crisis and writedowns necessary, you run the risk of contributing to a further loss of confidence and panic in the markets."

In a speech to the Council on Foreign Relations he also called for modesty: "Anyone who says that they can offer up predictions about what the perfect policies are, when they're perfectly going to start delivering their results and we're going to start climbing out of this, frankly is an idiot."

Nevertheless he believes that the government needs to do more to show how it is following through on its initiatives, possibly by setting benchmarks by which progress can be measured.

In his speech, Mandelson also warned that the essence of the European single market was likely to be eroded as ministers were pitched into competitive EU bail-out programmes for different industrial sectors.

He asked: "What am I supposed to do, sit back, watch them get on with it and put my own people and manufacturers at a competitive disadvantage within the European single markets? It will be a disaster. We are poisoned if we allow that to get out of hand.

"What we are confronted with is, in my opinion, nothing less than a sharp risk of dismantling, or at least damaging the global economic machine at the risk of deglobalisation."

Talking the UK down?

"I would urge you to sell any sterling you might have. It's finished. I hate to say it, but I would not put any money in the UK"

Jim Rogers, US fund manager

"The place that concerns us the most is western Europe, and specifically the UK. The UK is in a spiral"

Howard Schultz, chairman of Starbucks

"It's a big deal in Britain. But the term 'special relationship' is almost entirely foreign to American ears ... Now the economic crisis is taking its toll on an already rattled Britain"

Newsweek

"With the rapid fall of sterling, servicing British debt denominated in foreign currencies is becoming increasingly costly ... Perhaps the Eurosceptics in the other Reykjavik, the one on the Thames, may soon rethink their position as well"

Wall Street Journal