Gordon Brown last night backed away from plans for a recession-busting spending spree in next month's budget, after City investors delivered a stern message about the health of the public finances by shunning a sale of government debts for the first time since 2002.

In New York to canvass support for a deal at next week's G20 London summit on a worldwide economic rescue package, the prime minister said he had no plans to add to the £20bn fiscal stimulus announced by Alistair Darling last autumn, saying there were other "effective and quicker ways" of kick-starting demand.

Back in London, investors sent shockwaves through financial markets by shunning a £1.75bn auction of government IOUs - gilts - amid mounting fears about the Treasury's ability to pay for its bank bailouts and fill the hole left by collapsing tax revenues. "This is a bit of a shot across the government's bows," said Jonathan Loynes, of Capital Economics.

The prime minister's enthusiasm for an international economic agreement on tackling recession had been widely interpreted as an attempt to win political cover for a renewed spending spree at home, but he played that idea down yesterday.

"Nobody is suggesting that people come to the G20 meeting and put on the table the budget that they're going to have for the next year. What we are suggesting is that we have together to look at what we have done so far cumulatively," he said.

The apparent volte face added to the impression that the government's management of the economic crisis is descending into chaos, after Mervyn King, the Bank of England governor, who is overseeing the drastic policy of quantitative easing, raised doubts on Tuesday about whether another fiscal boost could be afforded.

Vince Cable, the Liberal Democrats' Treasury spokesman, said: "The open warfare breaking out between No 10, the Treasury and the Bank of England over the need for a further fiscal stimulus is clearly spooking the markets. If there is one lesson the government should have learned by now, it is that creating uncertainty is economic masochism."

The government's Debt Management Office will have to borrow almost £150bn from the markets on Darling's behalf over the next 12 months. The IMF has suggested that Britain is heading for the biggest budget deficit among the G20 countries next year, at 11% of GDP.

George Osborne, the shadow chancellor, seized on the auction news as vindication of the Conservatives' argument that the government's finances are in too perilous a state to permit a fresh round of fiscal stimulus. "The risk is that at some point the government will not be able to fund its huge debts, and that could push up interest rates for families and businesses at the worst possible time," he said.

City analysts said King's remarks to the Treasury select committee on Tuesday that the Bank might not need to pursue its full £75bn quantitative easing programme - which operates by buying gilts - had increased investors' alarm.

"People have just started to be slightly nervous about the Bank's commitment," said John Wraith, gilt strategist at RBC Capital Markets.

Yesterday's failed auction was of a relatively unusual 40-year gilt, not covered by the Bank of England's quantitative easing buyback, and the government can return to the market with bonds of a different duration. But Wraith said it showed investors were spooked at the scale of funding required. Markets fell in New York after weak demand for a sale of Treasury bonds also raised fears that investors were shying away from US government debt.

A Treasury spokesman said: "It would be wrong to read anything into the results of one auction event, which depends on the gilt on offer, demand and market conditions on the day."

He said King had signed up to the G20's communique earlier this month in which finance ministers and central bankers promised to "take whatever action is necessary until growth is restored".