By William James and Kylie MacLellan
LONDON (Reuters) - British Prime Minister David Cameron backed his embattled finance minister George Osborne on Monday in a bid to stem a bout of infighting triggered by the resignation of a senior minister.
Cameron's Conservative Party, already divided over a forthcoming referendum on membership of the European Union, descended into chaos over the weekend after Work and Pensions Secretary Iain Duncan Smith resigned with a fierce critique of Osborne, a close ally of Cameron, and his plans to cut welfare.
The pointed criticism of Osborne, whom Cameron has trusted to run the British economy since 2010, posed a threat to party unity ahead of the June 23 EU vote and brought calls from the opposition Labour Party for Osborne to resign.
Faced with the difficult task of calming tensions in a party with a long history of bitter internal rows, Cameron said Osborne's work on "turning our economy around" was essential to delivering his party's vision for the country.
"You can't show your compassion unless you have a strong economy generating the revenues that our health service needs, that our schools need, and indeed that our welfare systems need," Cameron told parliament.
Duncan Smith's dramatic exit, in which he said welfare cuts risked driving a wedge between the rich and the poor, was immediately seen by commentators as intended to destabilize Cameron as the Europe debate intensifies.
But Cameron also praised the outgoing welfare minister in an effort to calm the row which threatened to become a proxy for the internal party debate between eurosceptics, like Duncan Smith, and pro-Europeans, like Cameron and Osborne.
"(He) contributed an enormous amount to the work of this government and he can be proud of what he achieved," Cameron said of Duncan Smith.
Earlier, Labour seized upon the divisions by trying to call Osborne before parliament to answer questions on the welfare cuts. Osborne instead sent out a junior minister to field the queries, provoking criticism and ridicule.
"If the Chancellor is too scared to answer questions in this house on this issue, he's not fit to do the job," said Labour lawmaker Yvette Cooper to roars of approval from colleagues.
The government announced it was abandoning the contentious cuts to disability benefits, worth 4.4 billion pounds, and said it did not intend to make any further cuts to the welfare budget.
The row and subsequent u-turn damages Osborne's credentials to succeed Cameron when he stands down as leader of the party before the next election, currently due in 2020. ($1 = 0.6943 pounds)
(Editing by Michael Holden and Richard Balmforth)