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Liam Fox has warned that Britain should prepare for the possibility of war with another state as part of the government's strategic defence review.

The defence secretary told MPs the coalition should not simply assume that future conflicts will be like that currently taking place in Afghanistan.

The review, the first since 1997, will examine what sort of armed forces are needed in future and the cost involved.

Labour said it backed the review and "difficult" decisions would be needed.

Outlining the terms of the review, the defence secretary told MPs that the armed forces should not assume that future wars will be like the current counter insurgency in Afghanistan.

There could be conflicts over energy and water, new threats from failed states and a nuclear Iran - and even, he said, the return of state versus state conflicts.

There would therefore be, he said, a thorough stock-take of current contingency plans.

Britain must maintain a flexible capability to adapt to future threats and there should be a break from the military and political mindset of cold war politics, that prepared for war in space and cyber space.

He confirmed that the coalition remained committed to a continuous at sea nuclear deterrent but was scrutinising Trident to ensure value for money, a process that would be complete by July.

He said the threat of nuclear proliferation was something Britain shall face in the future and was not simply a by-product of the Cold War.

As for defence spending, Dr Fox said the review would have to confront the harsh facts of the economic climate

There needed to be a step change, he said, not the usual salami slicing and Britain's commitments will have to balance its resources.

His comments suggest the UK's defence capability is facing cuts as well as change.

Mr Fox has refused to rule out a cut in troop numbers as a result of the defence review but has insisted that all requested resources will be made available for British forces in Afghanistan.

For Labour, shadow defence secretary Bob Ainsworth agreed that "difficult decisions" would have to be taken on budgets and it was clear that a Cold War capability was not suitable to meet future threats.

However, he questioned the transparency of the Trident review and how the coalition partners would be able to accommodate their "separate views on the shape of the deterrent".