Howard Schultz, whose company is to cut 6,700 of its 167,000 staff and shut 300 of its underperforming outlets after announcing 69% drop in profits during the first quarter, described the UK economy as "in a spiral" while talking on US business channel CNBC.
An angry Lord Mandelson, who appeared on the channel an hour after Schultz, retorted: "The UK is not spiralling, although I have noticed that Starbucks is in a great deal of trouble.
"But that may be because of their overexposure given the state of the market. So please do not project Starbucks onto the UK economy as a whole."
Lord Mandelson's language was more forthright at a later diplomatic reception. He said: "Why should I have that guy running down the country? Who the fuck is he? How the hell are they [Starbucks] doing?"
Schultz, who had been asked by CNBC interviewer Maria Bartiromo about the launch of Via Ready Brew, had said: "Concern for us is Western Europe and specifically the UK. The UK is in a spiral."
Spiral or not, Starbucks' Via Ready Brew will be available from selected London shops from March 25. It will be pre-portioned into packets of three sachets or in boxes of 12 and priced at £1.20 and £3.95 respectively.
The launch of an instant variant follows a move last summer to offer US diner-style free refills at its UK outlets in response to belt-tightening consumers and the economic downturn. The company says it has been working on the product for more than 20 years and describes the instant coffee as a "breakthrough".
Schultz said that people being served the coffee could not tell the difference between instant and fresh brewed.
The instant coffee market is worth around $17bn globally -- Starbucks said its new product offers the struggling firm a significant opportunity.
In the UK the opportunity is particularly large. Instant coffee accounts for 81% of all coffee sales.