A Labour move for the exemption was beaten by a large majority in Strasbourg yesterday, as British politicians repeated warnings that the tax could cost up to 110,000 City jobs.
Although the vote in the European Parliament was only consultative, it underlined the UK's isolation on the issue. The only other EU country holding out against the withholding tax, expected to be set at 20 per cent on all savings, is Luxembourg.
After the vote Alan Donnelly, leader of the Labour MEPs, released a letter to the Chancellor, Gordon Brown, arguing that the draft directive is "flawed and against the interests of employment in Europe's financial services industry".
He added: "Unilateral EU-level action, as required by the withholding tax directive, runs the genuine risk of creating an outflow of capital to third countries such as Switzerland."
He warned that there were already clear indications of Swiss preparations for any new opportunities arising from the withholding tax.
Bryan Cassidy, Conservative economics spokesman at Strasbourg, said the proposals "could lead to thousands of job losses in the City if the eurobond market is forced to close due to misguided Euro-rules".
A motion approving the European Commission's proposals went through by 386 votes to 106, despite the opposition of most Labour MEPs.
Germany has already highlighted the importance it attaches to the measure, which, it argues, will help eliminate unfair tax competition.