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LIVE: Chancellor delivers speech on Scottish currency
The case for an independent Scotland retaining the pound in a currency pact with the rest of the UK is "not clear", according to a Treasury analysis.
Scotland becoming independent from the UK would "be a profound economic change for both states", it said.
In a speech later, Chancellor George Osborne is due to argue there would be an unbalanced relationship between an independent Scotland and its neighbour.
The Scottish government says a currency pact would be in everyone's interests.
Voters in Scotland will be given the choice of opting for independence in a referendum in September 2014.
Mr Osborne and Chief Secretary to the Treasury, Danny Alexander, are due to launch their analysis of currency options for an independent Scotland in Glasgow later.
They are expected to argue that even if an independent Scotland did keep the pound, Scotland would lose influence over key economic decisions.
'Fairer country'Mr Osborne told BBC Scotland's Good Morning Scotland programme: "The best arrangement for Scotland is the one we have at the moment where we are part of the United Kingdom, where we share the pound and all other options are second best."
The currency Scots use matters to them, as it does in any country. People want to know their coins, notes, savings and investments are securely backed.
So the choice of the pound, the euro or a new Scottish currency is of fundamental importance to the debate on Scottish independence.
It's also quite a complex one. But the clash of Treasury and Scottish government should help voters better understand what's at issue; the management of risk, the role of stability, the freedom to tax and spend, and the constraints that come from international pacts.
There is, amid this, a fundamental disagreement over who owns the pound sterling now, and the Bank of England.
The Scottish government says Scotland can expect to share such institutions, post-independence, having spent 300 years building them up within the UK.
But the UK Government takes the view that if Scotland votes to leave the UK, it can't expect to make demands of the UK's institutions.
It's hard to see how these views can be resolved, without either a lot of compromise or the help of the courts.
He added: "Of course it is for the Scottish people to decide whether they want to be independent but the question of whether you have a euro-style currency zone between the rest of the United Kingdom and Scotland is, frankly, not just a decision for Scotland, it is a decision for England, Wales and Northern Ireland and I think it is unlikely that you could get a currency zone agreed by the rest of the UK that would work.
"That's because the rest of the UK would ask questions about why it was in their interests to enter a euro-style arrangement.
"We would expect as part of that to have discussed very strict controls on the budget that Scotland would be able to operate. In other words Westminster would have a greater degree of control than it does at the moment under our devolution arrangements."
The chancellor further claimed that the Westminster government could expect to have more control over Holyrood than Germany has over its eurozone partners.
This is based on England, Wales and Northern Ireland accounting for roughly 90% of the proposed sterling zone monetary union, whereas the German economy makes up 30% of the eurozone.
However, the Scottish government's currency plans find that comparisons with the eurozone are misleading, because unlike Greece and Germany, Scotland and the rest of the UK have integrated economies with similar characteristics.
Scottish Finance Secretary John Swinney said such a system would let an independent Scotland "use the vital tax and other economic powers of independence to create jobs, grow the economy and build a fairer country".
It is also argued that Westminster would want to have a currency union because more than £45bn of goods and services are sold to Scottish customers, and oil and gas from Scottish waters would contribute billions of pounds to the sterling zone's balance of payments.
Mr Swinney told the BBC's Today programme: "What the Treasury's paper is designed to do is to make things sound as difficult and obstructive as possible and I don't really think it is a helpful contribution to the debate.
"We invited a number of leading international economists, including Joseph Stiglitz and Prof James Mirrlees, to advise us on the macro-economic framework that we have put forward and I have accepted their recommendations in relation to currency.
"I think they put forward a very rational and considered case for the establishment of a sterling zone that can work in the interests of Scotland just as much as it operates in the interests of the United Kingdom."
Mr Swinney said the Treasury was "playing with fire" in its arguments.
The UK government is making the point about the dangers and hazards, as the see it, of independence.
They say it is extremely challenging to create a currency union. They use the example of the Euro zone, which they say is a currency union without the close fiscal and political integration that is required.
In response to that the Scottish government gently, or perhaps not so gently, says George Osborne, given the current state of the economy under his stewardship, is hardly in a position to be preaching.
He said: "The chancellor is arguing in his paper that the UK would be the successor state, that it would hold on to the pound and we somehow could not get access to that.
"If that is his position then the UK as a successor state is obliged to hold on to all the debt and we would be liberated from a population share of UK debt of £125bn.
"Now if that is the kind of game and negotiation the chancellor wants to play he's welcome to do that but we are interested in a rational and considered discussion consistent with the Edinburgh agreement that both governments would work together to implement the outcome of the referendum next year."
The Treasury paper concluded that the economic case for a formal sterling union was not clear.
It also forecast that Scottish independence would lead to divergence between economies, leading to weakened integration and increasing difficulty retaining a currency union.
Fiscal riskTo manage the risk of two countries managing the same currency, the Treasury believes the authorities in London would need to exercise control over Scotland's policies, but it is argued that this would not happen in reverse.
The paper said: "An independent Scottish state would need to agree a negotiated set of constraints on its economic and fiscal policies."
This would "require rigorous oversight of Scotland's economic and fiscal plans by both the new Scottish and the continuing UK authorities. These constraints would need to reflect the difference in the degree of exposure to fiscal risk".
In the detailed analysis, due to be published in full later, the Treasury claimed it is "highly likely that an independent Scottish state would also have higher funding costs and face more constraining market conditions".
Particularly if Scottish membership of the European Union requires it to prepare for membership of the euro, the Treasury analysis said any doubts that a sterling pact might not prove durable could lead to "speculative activity" similar to the pressure that forced Britain to leave the European monetary union in 1992.
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