UP TO 25 million sheep, two-thirds of the UK flock, might be destroyed if BSE spreads from cattle.
Draft contingency plans published by rural ministry Defra this week revealed its nightmare scenario, prompting a backlash from farmers.
They claim the plans are based on a situation that will never happen.
Under Defra's emergency blueprint, the entire year's crop of lambs, some older sheep held for mutton and many breeding ewes would have to be culled.
It said there would be severe shortages of lamb until farmers could breed flocks resistant to BSE and similar diseases.
But angry sheep farmers believe the plans are alarmist and could deter consumers from buying lamb.
BSE has never been found as occurring naturally in sheep - although some have been artificially infected in the laboratory.
Farmers Union of Wales president Gareth Vaughan said: "Consumers must be aware that BSE has never been shown to jump the species barrier into sheep.
"It's disappointing that government is discussing a situation which is totally hypothetical."
However, scientists believe there is a possibility BSE has been masked by scrapie, a similar disease which has never been known to have infected humans.
More than 63,000 dead sheep have been tested for BSE and scientists are trying to explain 78 unconfirmed test results that do not match known profiles of either BSE or scrapie. These checks could take years.
Watchdogs are in the process of drawing up lists of foods containing sheep meat as well as products containing wool, hair and leather.
Compensation packages are being considered for farmers who would be forced to cull livestock or keep livestock for which there was no market.
Even if small-scale culling was ordered, the effects on consumer confidence would be catastrophic on Britain's £850m-a-year sheep industry.
Wales countryside minister Carwyn Jones stressed the risk of sheep contracting BSE was "very low".
"However, it is better to err on the side of caution," he said.
"I must make it clear there is no information to suggest an outbreak of BSE in sheep is likely, but any responsible government would be expected to have a contingency plan in place."