They were spotted at “Carafffini” near Sloane Square in Chelsea.
A witness said: “They were huddled together – they seemed slightly conspiratorial. They were talking animatedly but seriously.
“And they were in no rush to leave. Time didn’t seem to be an object. It was a very long lunch.”
The meeting comes after the Chancellor angered colleagues by saying it would be “irresponsible” to release cash for a hard Brexit in an article.
Downing Street is “furious” about Mr Hammond’s “naive” handling of Brexit and recent comments that he was not going to spend money on a “no-deal”, BBC Newsnight revealed on Wednesday.
There is anger in number 10 at the “obtuse approach” of the Chancellor to leaving the EU, according to BBC political editor Nick Watt.
Mr Osborne also has a personal vendetta against Theresa May and is said to have told friends that he will not rest until the PM is “chopped up in bags in my freezer”.
One Government advisor said the former Chancellor and the PM “can’t bear” to be in the same room together.
Mr Osborne was sacked by Mrs May last year and is widely suspected of co-ordinating opposition to Brexit from outside Government.
He is now editor of the London Evening Standard, he has used the paper to undermine Mrs May and her Cabinet.
Several former Cabinet friends and allies have now cut all ties with Mr Osborne as a protest.
A friend of party chairman, Patrick McLoughlin, said: “He has been sent to Coventry.
“Patrick, who was close to George, isn’t taking his phone calls anymore, and he is not the only one.
“It is hard to overstate the depth of anger and betrayal within the party over the way George has behaved. His attacks on Theresa are despicable.”
Mr Hammond rejected claims that he is trying to undermine Brexit and insisted it was absurd to suggest he was talking down the economy.
This is despite saying this week that leaving the EU “placed a cloud of uncertainty” over the economy.
Mr Hammond insisted that he is now ready to sanction preparations for the possibility that the UK might leave without a deal at a meeting of the IMF in Washington.
But he overstepped the mark by calling the EU the “enemy” and was forced to apologise on Twitter for his “poor choice of words”.
Speculation is mounting that if the Chancellor could be axed in the autumn reshuffle if next month’s Budget is a flop.
But a spokesman for the PM suggests they have a “good working relationship”.
Former Chancellor Nigel Lawson has called for Mr Hammond to be sacked, saying his approach comes “very close to sabotage”.
Sources at the Caraffini restaurant told the Daily Mail that the lunch took place at the end of September but Treasury sources insist it was earlier.