When Prime Minister Gordon Brown reshuffled his cabinet last week, fending off a challenge to his authority, a significant outcome was the creation of one of the most powerful ministerial jobs Britain has seen in years.

Peter Mandelson, a former European commissioner who has twice served in British governments in the past and twice been forced to resign, was reconfirmed as secretary of state for business, but also given greatly expanded authorities that make him a powerful if unofficial number two to Brown.

Much fun has been made of Mandelson’s new title, which because he has been elevated to the House of Lords in order to serve in the cabinet now officially reads as:

“Baron Mandelson of Foy in the county of Herefordshire and Hartlepool in the county of Durham, Lord President of the Council, First Secretary of State, and Secretary of State for Business, Innovation and Skills.”

But the length of the introduction aside, Mandelson’s new post puts him at the heart of tackling Britain’s worst recession in 60 years and planning for how the Labour government is going to rebound from a 20-point deficit in opinion polls to mount a challenge at the next election, due by June 2010.

Almost immediately it has also put pundits on watch about the possibility of Britain joining the European single currency, however unlikely that may be in the near term, since Mandelson is a committed European and euro-phile.

In comments in Germany last week, he described adopting the currency as “obviously” still an objective for the government.

“It is perfectly clear that the euro has been a great success in anchoring its eurozone members during this financial crisis,” Mandelson said after a speech in Berlin.

“Does it remain an important objective for Britain to find itself in the same currency as that single market in which it interacts? Obviously yes,” he said, adding: “That has to be a decision taken on the right terms, in the right circumstances and conditions, and therefore at a future time than we have now.”

Despite his hedging, bookmakers responded quickly to his comments, shortening the odds on Britain joining the euro before the end of the next parliament to 10/1.

“Europe and the single currency is always a divisive issue,” odds-maker Ladbrokes said. “But Lord Mandelson’s increasing power base means that it may again rise to the top of the political agenda.”

Surveys show that most of the British public does not favour giving up the pound for the euro, but many exporters and importers are keener on its adoption, which would neutralise exchange rate risks, even if it would also get rid of the comparative advantages sterling fluctuations can create. Almost 60 percent of Britain’s trade is with the European Union.

Brown and his predecessor Tony Blair always sidestepped the euro issue, but Mandelson’s newly influential role may allow him to nudge it back onto the agenda.

Gordon Brown was always expected to reshuffle his cabinet this week, but Friday’s series of chessboard moves were more dramatic than any commentators were predicting.

The most interesting shift is that of Peter Mandelson, the EU trade commissioner, back to Britain to take on the role of business secretary in the cabinet, probably with a focus on managing the fallout from the economic crisis.

Mandelson was for years an arch-enemy of Brown’s in former Prime Minister Tony Blair’s cabinet. The two rarely saw eye-to-eye and Brown’s deputies were open in making clear their dislike of Mandelson’s rival power-base to Brown’s at the Treasury.

A devoted-Blairite, Mandelson was dubbed the “Prince of Darkness” for his behind-the-scenes manoeuvring.

Brown’s decision to bring him back into government probably reflects several things: one, an acknowledgement that Mandelson is a skilled, confident politician who can get the job done. At a time of crisis, it says “better to bury the hatchet and get the best people on board” rather than keeping him isolated because of long-held grudges.

It also may reflect a desire to bring someone who is close to the levers of power in Brussels and the European Union back into the fold so that Britain is better positioned to handle its European ties at a time of global crisis, while also maintaining its close coordination with the United States.

The risk for Brown is that Mandelson ends up becoming an alternative power centre within the cabinet again. In many respects he outranks every other member of the cabinet for skills and experience.

That strength may damp down those — like Foreign Secretary David Miliband or Justice Secretary Jack Straw — who have been mentioned as possible challengers to Brown, but it may also mean that Mandelson is there to enter the fray should Brown’s position as prime minister ever be formally challenged.

Other elements of the re-shuffle were also of note. Margaret Beckett, a former foreign secretary and long-time Labour stalwart, is also brought back into the cabinet, another move that smacks of Brown wanting to surround himself with experienced, older faces rather than the new guard that has emerged over his past 16 months in office. She is expected to play a role as cabinet enforcer.

Another interesting move was the promotion of John Hutton, another Blairite, to run the Defence Ministry, sidelining Des Browne, a Scotsman and ally of the prime minister who is widely regarded by the military establishment to have been an ineffective defence secretary at a time when Britain is overstretched in Iraq and Afghanistan.

The details of the re-shuffle, expected to be formally set out later on Friday, are likely to be picked over for days. But the repurcussions of Mandelson’s elevation could last much longer than that.

Brown will be hoping they are positive rumblings, with Mandelson taking a tight hold of his portfolio in dealing with the economic crisis. But some in the cabinet — particularly long-term Brown-backers who always saw Mandelson as the enemy — may be quaking in their boots.