The prospect of greater interference in the running of faith schools is exposing divisions at the heart of Government. Supporters of Catholic schools say they should be left alone, secularists are spoiling for a fight and others are fearful that marginal seats will be lost

The political world entered unchartered territory after Jack Straw criticised Muslim women who wear the full veil. His article in the Lancashire Telegraph on 4 October, describing the veil worn by a woman at his constituency surgery as a "visible statement of separation and of difference", created an anti-multicultural storm at Westminster. The storm carried on through to the dismissal two weeks later of teaching assistant Aishah Azmi's claim of discrimination against Headfield Church of England Junior School in Dewsbury, Yorkshire. The storm now threatens the fundamental right of Catholic schools to give preference to Catholic children. Church schools have been caught in the crossfire amid anxiety about the large number of Muslim schools expected to enter the state sector. As a result, new faith schools could now be required to allow a quarter of pupils of others faiths or no faith.

According to one dismayed MP, the proposal was "only given salience by the veil story", which encouraged religion to be characterised as extreme and fundamentalist. That this has happened in the context of the multiculturalism story is not in doubt. Tony Blair even spelt it out at his monthly press conference last week, saying: "We wouldn't be having this debate if it were not to do with people's concerns about integration and separation of Muslims in British society." Supporters of multiculturalism are suddenly in a minority at Westminster

There is, of course, a wider context, too. Ever since Mr Blair took the early decision that Muslims should be allowed their own schools along with Jews and Christians, this controversy has been ready to break out in both secularist and anti-selection Labour circles, given the right circumstances.

The quota plan was originally contained in an amendment to the Education Bill tabled by the former Conservative Education Secretary, Lord Baker. Now it has been broadly accepted by the Government and apparently enthusiastically welcomed by the current Education Secretary, Alan Johnson. On Wednesday last week, he seized the moment to give a speech urging faith schools to address "division" and calling for a number of initiatives including teacher exchanges from one faith to another. "Young minds are free from prejudice and discrimination," he said. "So schools are in a unique position to prevent social division. Schools should cross ethnic and religious boundaries, and certainly not increase them, or exacerbate the difficulties in this sensitive area."

Cynics at Westminster who see everything through the prism of the low politics of leadership and rivalry believe Mr Johnson was demonstrating his progressive credentials and "dog whistling" to pick up support to the left of Gordon Brown. The Education Secretary, it should be remembered, is a potential challenger who was recently reported in the liberal-leaning Observer as being an opponent of the "Catholic tendency" in Cabinet (presumably meaning Ruth Kelly, supported by Mr Blair).

This may be reading too much into a mere speech on schools, of course. But either way, some exponents of faith schools were alarmed by what they saw as a gratuitous attack. Denis MacShane, a former Labour minister, has privately written to Mr Johnson to protest. He told The Tablet: "I can think of few better gifts to extremists than to say Catholic boys and girls should be curbed from going to Catholic schools ... This was simply an elderly Tory peer causing cynical political mischief."

Baroness Williams of Crosby - who was away during last week's debate after the timetable changed - rejects what she sees as "one of Lord Baker's instant solutions". She is particularly concerned, as are many Catholics, with the "resentment" that will be caused among Catholic parents when those from other faiths or none are favoured in their place. She does, however, recognise the need for a "balance", telling The Tablet that "We in the Catholic community have been slow to see the importance of integration" despite the segregation in Northern Ireland.

Baroness Williams, herself a former education secretary (1976-79), favours a "schools federation", provision for which, she says, is in the bill. This would involve a genuine sharing of resources and services, with Catholic schools, say, offering Latin classes to outsiders in certain circumstances. We can expect to hear more of this as the Liberal Democrats develop policy ideas in response to this debate.

So a high-stakes battle over the small print is under way in the Upper House. Supporters of faith schools now look to Lord Adonis, the Schools Minister whose closeness to Mr Blair is unrivalled among ministerial colleagues, to come to the rescue. The minister is said to be sympathetic to the schools' cause and was full of praise for them when he addressed the Catholic Educational Service's conference last May.

Significantly, Lord Adonis told peers this week that the compulsory element of the plan had been dropped, insisting "there will be no quotas" and that only new faith schools would be affected - not existing ones. Ministers even claim that the move actually extends the principle of faith schools, rather as, say, devolution was meant to enhance the survivability of the United Kingdom. As with the Union, however, the long-term future is far from certain.

Mr Johnson has said local authorities will be able to "require" new faith schools to admit a quarter of pupils from other religious backgrounds. But he also told religious leaders this week that the system would be based on local preference and demand. In cases where there was local opposition, he added that the Education Secretary would determine whether a new faith school could have fewer than 25 per cent non-faith admissions. Still unclear is what would happen in a battle between the local education authority and the local faith community. Which would the Education Secretary support?

Some MPs are unnerved because the age-old battle over who runs schools - Church or State - has up to now been largely dormant since the 1944 Butler Act which established free secondary education. They believe the debate may herald damaging consequences, and not just for Catholic schools.

Luckily for Labour at present, the Tories - who have so far this year been propping up the Government on education, hiding what is in fact the biggest parliamentary Labour rebellion in the party's history - remain confused. In a parallel universe the Conservatives might be relied upon to defend faith schools, but they are being distracted by the fashion for devolving decisions to community level. As a result, despite having opposed the Baker amendment, the Opposition now broadly backs the Government position, leaving the principle under threat.

Nonetheless, the potential electoral danger in this for Labour down the line has not been lost on some within the Government. As one senior (northern) New Labour insider says: "Challenging faith schools means challenging Catholic schools, which means undermining one of the bedrocks of support for Labour. Middle-class liberals have no idea how important this is to places like Scotland, Lancashire ... politically, the view in Number 10 has been that anything to do with Catholic schools should not be touched with a bargepole."

Another Blairite believes that the current strength of feeling against faith schools is nothing more than old-style prejudice: "The Left in the 1980s was very anti Church schools, and one of the features of New Labour was to drop this opposition. It would be a disaster if it were allowed to resurface."

The first test of the electoral consequences of last week will come at next year's elections in Scotland, which has seen before the effective exploitation of the Catholic schools issue by the Scottish National Party, to Labour's cost. This is far from over. Some secularists within the Government think they have Muslims and Christians on the run. Catholic sources, however, say the Church is ready for a fight "in every constituency in the land". This, they say, is so serious a threat, it is the "equivalent to abortion for British Catholics, with the potential to go nuclear".

Mr Blair's support for strong faith schools is not in doubt. Asked in an interview with The Guardian in February about why non-believers couldn't send their children to, say, a Catholic school, Mr Blair was robust, saying, "Well, it's a faith school", before adding words he may reflect on a little ruefully after last week: "Unless people actually want to get rid of faith schools - and whatever the depth of feeling is ... it isn't going to happen - it is better surely to have good and strong faith schools rather than weak ones."

There is no doubt that we are seeing a real policy change, and that faith schools are left more exposed this week. All eyes will be on enigmatic probable-next-Prime-Minister Gordon Brown, a man who values private religion but whose policy agenda remains Westminster's best-kept secret.

James Macintyre is the political producer of BBC1's Question Time.