Ed Balls has angrily demanded George Osborne withdraw the "utterly baseless accusation" that he had intervened to try and manipulate the inter-bank Libor rate while he was in government.
In an explosive argument across the Despatch Box in the Commons on Thursday, Balls attacked the "partisan" attack made on him in an interview with the Spectator magazine published on Wednesday,
Osborne suggested members of former prime minister Gordon Brown's administration had questions to answer about "who knew what and when" on lending rate rigging.
"My opposite number was the City minister for part of this period and Gordon Brown's right hand man for all of it. So he has questions to answer as well. That's Ed Balls, by the way," he said.
Speaking at the start of a debate on what sort of inquiry to hold into the banking, Balls pressed the case for an independent judge-led inquiry into the banking sector and what went wrong at Barclays.
The government has proposed that a parliamentary committee made up of MPs and peers conduct an investigation instead.
"The cheap and partisan and desperate way in which he and his aides have conducted themselves in recent days does him no good, it demeans the office he holds," Balls said
The shadow chancellor said an independent judge-led inquiry into banking was needed to "elevate this debate above the deeply partisan tone set by the chancellor and his colleagues".
He said false accusations had been made "not on the basis of evidence but purely in the hope of poltiical advantage".
"I have had no discusons at any time with anybody about the Libor market and its operation," he said.
"The House and the public will judge the integrity of a chancellor who can not defend here what he whispers to the Spectator magazine, he has no evidence because what he said is not true and he knew that too."
"I say to him he should either present the evidence or he should withdraw the allegation about me right now."
In a vintage Commons performance from Balls that also saw him blow kisses at the Tory benches, he added: "The site of a chancellor who says one thing to the press but can't defend himself to parliament is embarrassing."
Balls told MPs that there was "massive public anger" at the revelations of "lying and market manipulation" at Barclays had left "trust in our banks is in tatters".
"How we respond will have long term consequences for the future of banking and our economy," he said. "Only and open and independent public inquiry not politicians investigating bankers can re-build trust."
To laughter from the Labour benches, Balls also revealed that in 2008 David Cameron called for a independent public inquiry into the banking system, the very thing he now opposes.
Osborne refused to withdraw or apologise for his comments to the Spectator and told MPs that Balls had "questions to answer" as it had been suggested Labour ministers had intervened to influence the Libor rate.
And Osborne said Balls should apologise himself for failing to regulate the banks properly while he was City minister.
"The idea that I am going to take lessons on integrity smeared his way through 13 years of Labour government who half the people who ever served with him think he was a disgrace in his post is another thing," he said.
"The Brownite cabal with all their tactics are alive and well in the Labour Party and have taken over the leadership."
On Wednesday ex-Barclays boss Bob Diamond insisted he could not shed any light on the identity of "senior Whitehall figures" who suggested the rates were too high.
Giving evidence to the Treasury Select Committee, the former chief executive said Bank of England deputy governor Paul Tucker had relayed the concerns to him in a phone call in October 2008.
Diamond said he believed Tucker was trying to warn him that "there are ministers in Whitehall who are hearing that Barclays is always high, that could lead to the impression that you are not funding yourself".