Gordon Brown's government was rocked by a massive security scandal last night after the biggest ever data protection blunder resulted in the loss of the confidential details of 25 million people across Britain.

The parents and guardians in 7.25 million families - as many as 605,000 of them in Scotland - eligible for child benefit were urged last night to check their bank details for any evidence of identity theft and financial loss. It is only likely to emerge today whether any panic has set in and people begin closing their accounts to set up new ones.

What the Conservatives branded a "catastrophic mistake" occurred last month when a junior official at HM Revenue and Customs in Washington, Tyne and Wear, breached protocol by sending in the internal mail two discs, containing the entire child benefit database, to the National Audit Office (NAO), Whitehall's spending watchdog, in London.

The unregistered envelope, handled by the courier TNT, never arrived and a second was sent by registered post, again breaching protocol. It did arrive. However, it was almost three weeks before HMRC's senior management was informed that the first envelope had failed to turn up. Alistair Darling was informed on Saturday, November 10, while at home in Edinburgh and "immediately" told Prime Minister Gordon Brown. An urgent search was ordered but by November 14 nothing was found and Scotland Yard was called in.

The Chancellor urgently discussed the issue with Richard Thomas, the Information Commissioner, who agreed that remedial action should be taken before any public statement was made.

To date, the Metropolitan Police has insisted that there is no evidence to suggest the discs have fallen into the wrong hands.

As the news began to break about the scandal - the latest and most serious in a string of data security breaches at HMRC - Paul Gray, its chairman, announced his resignation In an emergency Commons statement, Mr Darling - with a grim-faced Prime Minister sitting alongside - apologised for what he said was "an extremely serious failure".

There was an audible gasp of incredulity from MPs when the Chancellor announced the scale of the blunder.

He said that the missing details included names, addresses, dates of birth, Child Benefit numbers, National Insurance numbers and bank or building society account details.

However, he made clear the missing data was in itself not enough to access bank accounts. Reports so far showed there had been no evidence of fraudulent activity.

The Treasury also explained that were anyone to become a victim of fraud, they would be reimbursed by the banks, which, in turn, would be reimbursed by the taxpayer. As for the HMRC, a spokesman explained that "disciplinary procedures are under way".

Last night, the NAO said it had asked for stripped down details but was told as a matter of policy this could not be done, implying that a decision was taken not just at a junior level but also a senior one.

In the Commons, Shadow Chancellor George Osborne was shocked by the scale of the breach, branding it a "catastrophic mistake". He insisted it was the "final blow for the ambitions of this government to create a national ID database" given that it could "not be trusted with people's personal information".

Vince Cable, for the Liberal Democrats, questioned whether the resignation of Mr Gray was enough and claimed that the Treasury had replaced the Home Office as the department which was now "not fit for purpose".

Last night, No 10 made clear the Prime Minister had "full confidence" in Mr Darling and that the Chancellor had not offered his resignation. However, coming on the back of the Northern Rock debacle, the data security scandal will hit the government hard and call into question its competence.

Mark Serwotka, general secretary of the Public and Commercial Services Union, said the loss of the information should be seen in the context of enormous pressure being placed on HMRC by government-imposed job cuts, totalling 25,000 by 2011.

Last night the Independent Police Complaints Commission, which monitors HMRC, confirmed it was also investigating the security scandal.