The Chancellor said Alex Salmond’s plan for a eurozone-style currency union after separation would mean Scotland having influence over tax and spending levels in the remainder of the UK.
He questioned why a country of around 58 million people “would give away some of their sovereignty” to a different nation with a population of only five million.
Speaking in Glasgow, he said any British Chancellor would have to provide the English, Welsh and Northern Irish with a “clear and compelling answer” to this question.
John Swinney, the SNP Finance Minister, retaliated by claiming that a separate Scottish government could refuse to accept their share of the UK's national debt.
However, the likely rejection of a currency union left Mr Salmond’s economic blueprint for independence in disarray, with questions being posed about his ‘Plan B’ ahead of next year’s independence referendum.
Mr Osborne and Danny Alexander, the Chief Secretary to the Treasury, yesterday unveiled a detailed analysis of a separate Scotland’s currency options that concluded none were as beneficial as the status quo.
Written by Treasury civil servants and academics, it said Scotland could also adopt the euro, create a new currency or use the pound without any formal agreement in the same way countries like Panama use the US dollar.
There was no good reason for the English, Welsh and Northern Irish to agree to currency union, it concluded, as they would bear the vast majority of the financial risk if Scotland’s economy faltered.
Even if a deal could be reached, Mr Osborne said Scottish ministers would have to hand their annual budgets over to Westminster for approval even before they had been voted on at Holyrood.
However, the Chancellor also said that a currency union would mean Scottish ministers having a say over tax, spending and borrowing in the remainder of the UK.
Mr Osborne quoted one of Mr Salmond’s economic advisers, who questioned why the rest of the UK – with 91.5 per cent of the total population – “should concede oversight of its policies to Scotland.”
“The fundamental political question that analysis creates is this: why would 58 million citizens give away some of their sovereignty over monetary and potentially other economic policies to five million people in another state?” he asked.
“Before the rest of the UK could ever agree to enter a formal currency union, any future UK Chancellor of the Exchequer tied to independence would have to provide the British people with a clear and compelling answer to this question of sovereignty.”
He later refused to comment on whether this would involve staging a second referendum asking people south of the Border whether they wanted a currency union with Scotland.
Despite calling for a deal, he said the SNP had yet to spell out precisely what controls over the remainder of the UK’s economy a separate Scotland would want to obtain.
He also argued that the economic “imperative” to enter such an agreement would be much less for the English, Welsh and Northern Irish.
Around 30 per cent of Scottish output is exported south of the Border compared to only five per cent of the UK’s that travels in the opposite direction.
However, Mr Osborne said: “The rest of the UK, as the larger economy, would be much more exposed to an independent Scotland running into fiscal and financial difficulty.”
The Chancellor said the Nationalists were failing to answer basic questions about their currency policy, which he claimed had become mired in confusion.
“Abandoning the current arrangements would represent a very deep dive indeed into unchartered waters,” he said.
“Would a newly independent Scottish state be prepared to accept significant limits on its economic sovereignty, to submit its budgetary plans to Westminster before Holyrood? And what is the economic case for the remaining UK?”
Mr Osborne concluded: “The saying goes if it ain’t broke, why fix it? But I say if it ain’t broke, don’t break it.”
But John Swinney, the Scottish Finance Minister, warned the Chancellor that he was "playing with fire".
He said Scotland could walk away from its share of the UK's debts if the Westminster government refuses to come to "a rational and considered agreement".
"What the Treasury paper is designed to do is to make things sound as difficult and as obstructive as possible. I don't really think it is a particularly helpful contribution to the debate," he told the Today programme.