The stand-off between British business and the coalition government over plans to cap immigration was threatening to turn into open conflict after it emerged that many companies would not be allowed to hire any non-European staff for the rest of the financial year.

Lady Jo Valentine of London First, a lobby group representing many FTSE 100 companies, described the measures as “economically insane”.

Leading City law firms said several of their biggest blue-chip clients, including large international banks, would be given only a handful of work permits, and in some cases none.

“We have a number of international financial institutions whose allocation has been reduced to zero,” said John Skitt, head of immigration at Clifford Chance.

Caron Pope, who leads the immigration practice at Cameron McKenna, said companies were “furious” about the restrictions. “I’ve had conversations with people who are saying ‘if they are going to make it this hard for us then we’ll just go offshore’,” she said.

The issue is fast becoming one of the biggest early tests for David Cameron, the prime minister. The idea to limit non-European Union workers coming to the UK was a popular part of the Conservative party’s election manifesto.

However, several of Mr Cameron’s cabinet colleagues have raised profound doubts about the cap, arguing that it would damage Britain’s competitiveness and anger important trading partners such as India.

The subject of the cap was centre stage during Mr Cameron’s visit to India this week, with many people there deeply unhappy with the proposal. Vince Cable, the business secretary, admitted during the visit that the cap was still a matter of debate within government.

But Damian Green, the immigration minister, said yesterday: “Businesses have known about the limit for a month, so it is a little implausible that they are expressing shock now …They are going to have to reduce their reliance on migrant workers.”

The UK Border Agency was forced to hurry through an interim cap last week because of fears about a flood of applications ahead of the introduction of a permanent limit in April.

However, lawyers said the rush meant the border agency has had to use crude measures to work out how many work permits should be allocated to each company. The agency looked at how many visa applications each company made during the same period last year and then reduced that number.

“It was the worst recession in 70 years, with most companies hanging on by the fingernails,” said Ms Pope. “To use this period for comparison is extraordinary.”

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