Final decisions have yet to be taken, but the Education Secretary has this week raised the stakes by saying in a TES interview that she prefers a system that would allow public and private agencies to bid for under-fives funding. Nursery vouchers have become such a high-profile issue that should Gillian Shephard lose the battle in the Cabinet her credibility as Education Secretary would be compromised.

Mrs Shephard told The TES that vouchers “are not the favoured option” to deliver the Prime Minister’s commitment to start to provide by the next election nursery education for the parents of all four-year-olds who want it.

A right-wing think-tank, the Centre for Policy Studies, has been campaigning for vouchers as a means of creating a larger market for private nurseries and there appears to be support within the Cabinet for such a scheme.

According to Mrs Shephard, policy is not yet decided, but there are no plans to introduce the legislation vouchers would require. The Bill planned for the next session of Parliament is one that will allow grant-maintained schools to borrow on the open market.

“Legislation may not be necessary for our nursery proposals. A full-blown voucher scheme would require legislation,” she said.

The controversy generated by the issue has made the Department for Education cautious about revealing what is under consideration. Mrs Shephard insists that there is no split with Downing Street and cites the reservation about vouchers expressed by John Major. In a recent interview, the Prime Minister said there was a strong case for vouchers, which encouraged choice, but other methods might be speedier.

A bidding system would allow the Government to expand places more gradually and would probably permit better quality control . It could directly control funding; provide money through local authorities or create an agency, according to Mrs Shephard.

The extra places may be new or created by expanding existing nursery schools. Mrs Shephard favours setting minimum standards on the kind of activities suited to the age group.

Civil servants have looked at the range of options for expanding places. “There are usually a number of options and most options have advantages and disadvantages,” she said. Any expansion has to be achieved without putting private nurseries or voluntary groups out of business, says Mrs Shephard. The Treasury will be keen to keep down costs.

There appears to be support within the Cabinet for vouchers - there will be discussion this week of plans to issue education vouchers worth up to Pounds 8,000 to sixth-formers - and the final outcome could depend on the attitude taken by the Prime Minister.

The DFE is also working on plans to intervene in schools where standards are poor, but have not been judged to be failing. So far, inspections have thrown up 38 failing schools, with another 10 in the pipeline. A larger group fall into the category of nearly failing and local authorities may be given powers to tackle their problems.

The Office for Standards in Education has not been able to meet its targets for inspecting primary schools, but Mrs Shephard said she was confident the statutory requirement for all schools to be inspected in four years would be met.