George Osborne has backed an above-inflation rise in the national minimum wage as he sought to counter Labour attacks over the cost of living.
The Chancellor indicated that he was ready to contemplate an increase of almost 11% in the present £6.31-an-hour rate to £7 to restore it to pre-recession levels.
Employers warned too steep a rise could result in job losses and Mr Osborne's comments came just days after he warned against any "self-defeating" hike.
But his timing - on the eve of a major economic speech by Labour leader Ed Miliband - was widely interpreted as a deliberate move to outflank the Opposition.
Such a rise, he said, would "make sure we have a recovery for all and that work always pays" - a clear riposte to claims the less well off are not benefiting from economic recovery.
Prime Minister David Cameron said: "Because of the difficult decisions we've taken to fix the economy, we believe we can now afford to increase the minimum wage - putting more money in people's pockets and helping them provide for their families."
Labour accused Mr Osborne of "flailing around under pressure" and pointing out that only this week the party's call for the rate to be restored was defeated in a Commons vote.
Liberal Democrat Business Secretary Vince Cable said: "I'm delighted to have the Chancellor's endorsement of the position I set out back in September."
Frustrated Lib Dems complained however that the Chancellor had blocked them from publicly pressing for such a significant increase.
The indepedent Low Pay Commission is due to make its recommendations on the level of the minimum wage and its potential impact on jobs in February.
But in a clear signal, Mr Osborne told the BBC: " I believe Britain can afford an above-inflation increase in the minimum wage.
"Of course we have got to make the exact calculation of what the rate should be. That's for the Low Pay Commission, created by a Labour government, supported by this government, to make the independent decision on the number itself.
"But, when I look at the British economy I see the British economy expanding, I see jobs being created, I see the prospect of future jobs being created as well and I think Britain can afford a higher minimum wage."
Any above-inflation rise in the main rate for adults would be likely to be reflected in the £5.03-an-hour rate for 18-20 year-olds and £3.72 for under 18s.
The TUC welcomed the move but said the Chancellor needed to be "more ambitious" about increasing wages more widely and getting more on to the higher "living wage".
Len McCluskey, the leader of the UK's biggest trade union Unite, dismissed "the promise of jam tomorrow" and said there should be an immediate rise of £1.50 an hour.
Business leaders urged caution - with the Federation of Small Businesses insisting the minimum wage should rise only in line with inflation, currently running at 2%.
Economic recovery " remains on a fragile footing in certain regions of the UK", it warned.
CBI director general John Cridland said: "An unaffordable rise would end up costing jobs and hit smaller businesses in particular."
And the British Chambers of Commerce - which wants a 2.4% rise - said small businesses, young people and graduates risked losing out.
Labour Treasury spokesman Chris Leslie said: "George Osborne is flailing around under pressure but he has made no concrete announcement about the level of the minimum wage.
"Ed Miliband and Ed Balls said last year that we need above-inflation rises in the minimum wage in order to catch up the lost value over the last few years. And both the Tories and Lib Dems voted against Labour's motion yesterday which called for action to make this happen.
"The Tories cannot hide from the fact that working people are on average £1,600 a year worse off since they came to office."
Work and Pensions Secretary Iain Duncan Smith welcomed what he called the Chancellor's "bold move".
"It shows that at the heart of all our reforms this government is concerned to improve the quality of life for the poorest in society," he said.
His comments were echoed by Alison Garnham, chief executive of Child Poverty Action Group, who said that Mr Osborne's suggestion would " do a great deal of good both for the poorest working families and for the economy".
Mr Cable said he had not been pre-warned that Mr Osborne was going to make his comments - and warned that the process had become politicised.
"I was a little surprised but I was not taken aback by it. Imitation is the best form of flattery," he told BBC2's Newsnight.
"I don't know what his motives are but I am happy that he has come to the right place.
"It is very, very important that we concentrate on the fairness agenda."
The Chancellor had written him a letter on Wednesday setting out his views which was included in his department's final submission to the Low Pay Commission, he said.
"This whole thing has become very politicised. It is important that we recognise that this is an independent body, it is non-political, it is non-partisan, it is unions and employers.
"Their views have to be respected."
It was traditional, he said, for the Business Secretary - who has the final say on the issue - to accept the commission's recommendation on the level of the minimum wage.
He asked the body last year to examine whether there was scope for a large rise.
Asked about business concerns, Mr Cable said that he was "being very cautious" in ensuring the impact on the wider economy was considered.
The national policy chairman of the Federation of Small Businesses, Mike Cherry, told BBC Radio 4's Today programme: "The FSB has been very clear that we think that the recovery is beginning to gain a little bit more momentum and that an inflation-rate rise is certainly viable for a majority of our members."
But he warned against an above-inflation rise, which he said would be unaffordable for many businesses in sectors like care homes, retail, hospitality and wholesale.
"It's going to cost jobs," said Mr Cherry. "There's no two ways about it. At the bottom end of the marketplace, where businesses are really struggling, it is going to set confidence back, it's going to set investment back and they are just not going to be able to recover these sorts of massive increases."
Mr Cridland said that politicians should not seek to influence the LPC's decisions.
He told the Today programme: "The CBI fully supports the Low Pay Commission - a body of employers and trade unions - which sets the minimum wage based on the evidence. It shouldn't be politicians who second-guess the labour market, it should be the experts, because they protect people's jobs and try to give them higher wages if that's affordable.
"I cannot support political intervention in the work of the Low Pay Commission. The Chancellor and Vince Cable yesterday both said they wouldn't do that. Having been a former low pay commissioner, I can tell you the Low Pay Commission will only make its recommendation on the basis of the evidence."
Responding to claims that Mr Osborne should not have intervened in the way he did, David Cameron's official spokesman said: "What the Government did yesterday is submit evidence to the Low Pay Commission and it is for them to make recommendations.
"That's the right way to be going about it. The Chancellor was very clear about that... There is a long-established process which started when the Low Pay Commission was established under the previous administration for the government of the day to submit evidence to the Low Pay Commission. That's what the Government is doing."
Asked about predictions that wages will outstrip inflation in 2014, the spokesman added: "The Prime Minister and the Government want to see people's wages rising.
"The Office for Budget Responsibility in its most recent forecasts forecast wages to be rising in real terms in 2014. We want people's wages to be rising. The way to go about ensuring that is to have a long-term economic plan, which the Government has put in place."