John Kampfner reveals that the PM really did agree to go. Don't bet against an exasperated Chancellor soon issuing a challenge to his rival

Nothing much has changed. That is the official line. The furore over Alan Milburn's appointment was overblown; Gordon Brown will soon get over it. The Blairites, having fought so hard to get Milburn in place as the Prime Minister's right-hand man, are now trying to portray his appointment as a routine sort of thing. Over the years, Tony Blair has had a number of fixers in and around Downing Street and the Cabinet Office - Jack Cunningham, Peter Mandelson, Charlie Falconer spring to mind - so Milburn merely fits the pattern. His focus on strategy, they say, reflects a particular need to provide fresh impetus for a third term in government. In any case, he had informally been doing similar work, chairing a number of seminars for Blair on future policy.

It is in their interests to say as much, but it is factually wrong. Brown is not reconciled to the new circumstances. He is seething. The anger has not dissipated since the reshuffle; if anything it has grown, fuelled by the repeated bruiting of Milburn as Blair's anointed successor.

People around No 10 speak of political shelf-lives, of some politicians who miss the boat and others who seize the moment, such as Margaret Thatcher in 1975-79 and Blair in 1994-97. There is talk now of a Prince Charles scenario, with the heir to the throne left waiting for years and, eventually, being overlooked. The No 10 people are happy for the appropriate inferences to be drawn.

Blair and Brown have had just one conversation in the past few days. It was, I am told, brief, to the point and seemingly a foretaste of things to come. The Prime Minister is no longer consulting his Chancellor in the way he did, and the Chancellor is taking stock of how the already fragile relationship has been shattered.

Brown is mulling over his next steps. After last year's Labour conference performance, with its coded challenge to Blair, he is deliberating how far he can go in his speech this year. Such is the mutual suspicion that he assumes it will be portrayed as divisive no matter what he says. In the past Brown was wary of going too far. Now, I am told, the Chancellor feels a certain sense of liberation. He no longer feels himself constrained.

All this still begs the most important question: then what? What is Brown supposed to do now he feels so egregiously snubbed? Will he continue to sit in the Treasury, quietly getting on with his work, knowing that his once undisputed control over domestic policy has been eroded? Will he take calls from Milburn's office in No 10 to be summoned for meetings? What on earth will he and Blair have to say to each other? For the sake of party unity, will he continue to bite his lip?

Brown is particularly sensitive to accusations that over the past 12 months he bottled out of a challenge. His decision to help Blair - and undoubtedly he did bale him out on at least two occasions, on the eve of war and in the vote on tuition fees in January - was not, he insists, a sign of weakness but of strength.

The difference in their recollections of the past is more sensitive now than any difference in their visions of the future. And yet on the facts there seems little dispute.

The two men did agree a deal last November in front of John Prescott: Blair indicated his intention to stand down by the end of 2004 and Brown indicated his intention to support him fully in the interim.

In the following months more conversations were held on the exact timing and the manner of his departure. There was, I am told, no ambiguity, no possible cause for a misunderstanding. The Prime Minister's political and family problems in May and June - brought into the public domain last Tuesday by Lord Bragg, among the closest of the Blairs' friends - brought matters to a head. By July, however, thanks to Lord Butler's unwillingness to wield the knife and Michael Howard's failure to break through in the local and European elections, Blair changed his mind. His conversations with Brown about a transition dried up.

Given the misunderstandings of the past, and given Blair's propensity to tell people what he happens to believe at that given moment, it is surprising that nobody thought to commit the conclusions of the November confab chez Prescott to paper. The best explanation I have been given is that this would have reinforced rather than dispelled suspicion - rather like a pre-nuptial agreement. The Brownites were so convinced of Blair's pledge that they took him at his word. But this was not a new marriage: this was one more than ten years old, with many betrayals and fights behind the couple. Something could always be salvaged from previous arguments, but this one is altogether different.

The volte-face at No 10 was predicated on a particular understanding of Brown's character. Two adjectives are commonly ascribed, both double-edged. He is seen as loyal - to the party - and cautious. Both are used to reinforce the idea that the Chancellor would not precipitate a crisis, no matter how aggrieved he might feel. He would not have done it over the past few years, with Blair in dire trouble over Iraq, he would not do it now, with a general election so close at hand, and there is an assumption that he would not do it immediately after the election.

Such confidence may be overblown.

There does seem little prospect of matters coming to a head before the election, if only because any such move would severely jeopardise Labour's chances and the size of a future majority. But after next May or June, what happens then? Blair is desperate to make something of his third term, to make a difference on issues such as public service reform, welfare and Europe. Having downgraded Brown's role, the Prime Minister is in the strange position of controlling more political levers than at any other time, while possessing less political capital than he has ever had. He has allowed himself to be convinced that Brown is the most important brake on radical change.

Once the election is over, old notions of loyalty will no longer apply. The Chancellor knows that if the results have gone well, Blair will be tempted to run and run and to fashion his government more in his image. Gordon Brown will have to confront the choice he has steadfastly refused to make - to accept his lot or to change it. After several conversations over the past week, I would not now bet against the latter.

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