Disagreement between the Departments of Defence and Finance over reductions of up to 3,000 in Army, Naval Service and Air Corps personnel is delaying the publication of the Government's White Paper on Defence.
There is also sharp division over footing the enormous bill for the Army hearing damage compensation claims, with costs to date running at £100 million.
The Department of Finance is insisting that the final bill for the deafness claims will be met from the Department of Defence budget, rather than from overall Exchequer resources.
The Department of Defence is believed to have rejected this proposal. The Minister, Mr Smith, is understood to have insisted that the matter be fully clarified before signing off on the White Paper.
A Government source confirmed last night that staffing numbers are the "primary issue" outstanding in the preparation of the White Paper.
In a submission as part of the consultative process on the paper, the Department of Finance has proposed significant cutbacks in the Defence Forces. There are currently almost 11,500 personnel in the Army, Naval Service and Air Corps.
Officials at the Department of Finance want these numbers reduced to around 8,500. They have suggested reductions in the size of the Army, along with a decrease in staff numbers by amalgamating the Air Corps and the Naval Service into a coastguard service.
However, within Government circles Mr Smith is considered to be in a strong position, especially given the hostile reaction which any talk of significant reductions in personnel would generate from the various Defence Forces representative bodies.
A military source last night predicted "complete consternation" should the White Paper include any reference to reductions in Defence Forces personnel. He said such a move would have wider implications for the State, given the commitments made recently with the decision to join the NATO-led Partnership for Peace.
However, it is understood that Mr Smith is now under strong pressure from the Department of Finance to agree to scaling down the Defence Forces.
A Government source said last night that Mr Smith has been "fighting strongly" against the inclusion of such a proposal in what will be the first White Paper on Defence.
The paper was promised in the Fianna Fail-Progressive Democrat Programme for Government published in 1997. Consultations on the paper began in July last year.
Despite the inter-departmental dispute, the White Paper is expected to be published by the end of next month.
It will deal with strategy for the Defence Forces over the next 10 years in the context of greater opportunities for Irish involvement in international humanitarian and peacekeeping operations. The document is also expected to outline the case for a significant re-equipment programme for the Defence Forces over the next decade.
It is understood that Mr Smith has been seeking additional resources to maintain staffing levels, so as to enable the Defence Forces to participate fully in future peacekeeping and humanitarian missions of the United Nations.
The decision to join PfP is likely to add to the budget necessary to fund Defence Forces participation in such activities.
A Government-commissioned report on the future of the Naval Service and the Air Corps, compiled by consultants Price Waterhouse, has already recommended a £235 million re-equipment of the two defence services, additional staff for the Naval Service, and a reduction in Air Corps personnel.