Olympics London 2012: Fresh controversy has erupted over the spiralling budget for the London 2012 Olympics after it was revealed the Games could face a sales tax (VAT) bill of more than £250 million (€38 million).

Tessa Jowell, the British culture secretary, admitted in the House of Commons London's initial budget to stage the games did not include the 17.5 per cent cost of VAT on the construction of the venues and infrastructure. The Treasury has indicated its hands are tied by European law and that the Olympic Delivery Authority (ODA) will have to foot the additional tax bill.

Hugh Robertson, the shadow sports spokesman, said he had been given a personal "castiron assurance" about six months ago by Jowell in a corridor of the House of Commons that VAT would be waived on building the Olympic facilities.

But yesterday she said the VAT issue was one of a number of subjects still to be agreed as part of a new public sector funding package for the Games.

The Olympic project has been under an increasingly harsh spotlight since the resignation of Jack Lemley, the US businessman brought in as chairman of the ODA, who was supposed to bring the games in on time and on budget. Lemley, who has returned to the US, warned last week of soaring costs and political feuding.

Yesterday Tony Blair, speaking at his monthly press conference, said Ken Livingstone, the mayor of London, was right to say there should not be an additional call on London's council tax payers.

"We have said what should come from Londoners and I don't think we should be looking at more," Blair said. "I don't doubt before the project is through there will be a series of ups and downs on the costs and every single aspect of it."

The construction budget for the games stands at £2.375 billion, plus £1.044 billion for regeneration around the Olympic village at Stratford, east London. Discussions are taking place between the Department for Culture, Media and Sport (DCMS) and the Treasury over including another £2 billion of regeneration work in the Lower Lea valley in the overall Olympic budget.

Jowell came under fire at question time in the Commons, when she was challenged by Robertson to confirm VAT would not be levied following the personal assurance she had given him. She responded angrily.

"This is really quite disgraceful. I had a conversation with you where in complete frankness I told you what the position was at the time," she said.

Treasury officials suggested a technical problem had been overblown. A spokesman for the Treasury said: "These are complex issues, not least because of the binding nature of EU VAT and state aid law. We are in discussions with the DCMS and the ODA about these issues and we are confident that we can find a way forward, but it would not be helpful to give a running commentary."

• Guardian Service