Hammond reportedly made the comments at a cabinet meeting last week where he refused to lift the 1% cap on government employees on the basis that they earn more than those in the private sector.
Mr Hammond is said to have told the meeting that public sector workers are "overpaid" and "even a woman can drive a train".
Global trade secretary Dr Liam Fox yesterday accused those of leaking as having "too much self-indulgence".
"Two-thirds believe cuts to public services have gone too far and three quarters want to see a pay rise for public sector workers this year".
The extraordinary disclosures have exposed the deep divisions at the heart of Government as Britain attempts to negotiate Brexit and Mrs May battles to keep her job in the wake of her miscalculated General Election gamble.
We don't need an interim leader, we don't need an alternative leader.
Hammond's defence came after a cabinet source at the meeting told the Sunday Times: "Philip used a fairly inflammatory phrase - he said they were "overpaid".
He said there was "great divide" in the Conservative Party on whether there should be a leadership contest, with many backbenchers and new MPs "seethingly furious" about the antics of those in the Cabinet.
Theresa May will tell ministers that they should focus on their job of delivering for the public.
DG: "Every July Westminster gets feverish and every July people say it's different this year and you know what it's the same every year".
He was pointing out that public sector earnings are still higher than those in the private sector, despite years of pay restraint after the credit crunch sent the economy into a tailspin.
Unison's Christina McAnea called the chancellor's remarks on public pay "nothing short of offensive".
"It is absolutely clear that businesses, where they have discretion over investment, where they can hold off, are doing so and you can understand why", he said.