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".