Labour leader Ed Miliband has claimed a controversial report by a Downing Street adviser which called for changes to make it easier for businesses to sack people showed the "nasty party" was back.
But David Cameron dismissed the attack over the "good report" he commissioned from venture capitalist Adrian Beecroft, claiming Labour opposed any changes because Mr Miliband was "in the pocket of the trade unions".
Mr Cameron told MPs the report contained excellent ideas but the Government was consulting on the idea of no-fault dismissal only for "micro-businesses".
The report's proposals have highlighted tensions within the coalition, with Liberal Democrat Business Secretary Vince Cable saying the no-fault dismissal idea was "complete nonsense".
Mr Miliband said: "Adrian Beecroft, the Prime Minister's adviser, says the law should be changed to allow employers to fire people at will.
"The Business Secretary says it is the last thing Government should do."
Asked whether he agreed with Mr Beecroft or the Business Secretary, Mr Cameron said: "We need to make it easier for businesses to grow, for businesses to take people on, for businesses to expand.
"The Beecroft report, which I commissioned, had a number of excellent ideas that we are taking forward.
"We are doubling the qualifying period for unfair dismissal, we are exempting businesses with less than 10 people from new EU regulations, we are exempting a million people who are self-employed from health and safety.
"We are consulting on no-fault dismissal, but only for micro-businesses. It was a good report and it's right that we take forward its best measures."
The Labour leader said the report suggested being able to "fire at will" and added that the Tories "think the Beecroft proposal is a great report, is the bees knees".
But, he added, the Lib Dems "think it's a bonkers proposal and the Business Secretary has been going around saying it".
Mr Cameron told Mr Miliband: "I know you worry about being fired at will for being incompetent."
The report suggested "some people will be dismissed simply because their employer doesn't like them" but that was a "price worth paying", Mr Miliband told MPs.
He asked the Prime Minister: "Are you really telling us that, with record numbers out of work, sacking people for no good reason is a price worth paying?"
Mr Cameron said unemployment was falling, inflation was coming down and the Government had cut the deficit by 25%.
He told Mr Miliband: "We are cutting regulation by £3 billion, we are scrapping 1,500 regulations, we are looking at introducing fees for employment tribunals.
"We are taking all of these steps which have led to the greatest number of small business start-ups last year in the country's history.
"Of course, you cannot support any changes to employment regulation because you are in the pocket of the trade unions."
Accusing the Prime Minister of "double standards", Mr Miliband said: "When it comes to ordinary workers he wants to make it easier for employers to sack them.
"When it comes to Andy Coulson and the Culture Secretary (Jeremy Hunt) it's all about second chances."
He asked Mr Cameron "what impression he thinks it gives about his Government that he commissions advice from a multi-millionaire who recommends making it easier to sack people on low pay at the same time as giving people like him tens of thousands of pounds in a millionaires' tax cut".
The Prime Minister said: "I'll tell you what we do on this side of the House: we commission a report, we accept the bits we agree with, we reject the bits we don't agree with."
But Mr Miliband "takes instructions from his trade union paymasters and he cannot accept any changes".
The Labour leader said: "This is not about the trade unions.
"It's about millions of people up and down this country in fear of their jobs and the only answer this Prime Minister has is 'make it easier to sack them'.
"This proposal is a symbol of the Government's failure on growth. We are in a double-dip recession, unemployment is high, businesses going bust, bad retail sales figures today."
The Prime Minister was "out of touch" when he said last week that "things are moving in the right direction", the Labour leader added.
But Mr Cameron told Mr Miliband: "This is about the trade unions and let me tell you why.
"You are getting £900,000 from Unite and they are threatening a bus strike in the Olympics. What have we heard from you? Silence.
"You are getting £400,000 from the GMB, they are holding a baggage handlers' strike over the Diamond Jubilee weekend. Absolute silence from you."
But Mr Miliband hit back: "On March 23 the Chancellor cut the top rate of income tax, then the money comes flooding in from the Tory millionaire donors.
"It tells you all you need to know about this Government: they stand up for the wrong people."
Mr Cameron "may have changed the image of the Tory Party but the reality hasn't changed".
"Tax cuts for millionaires, making it easier to sack people, the nasty party is back."
Mr Cameron defended his record, telling MPs: "It's only Labour who think the answer is more borrowing, more spending, more debt, exactly the problems that got us into this mess in the first place."
The Labour leader faced calls from Tories to apologise for the economic legacy Labour left behind after Mr Cameron highlighted the comments made by International Monetary Fund head Christine Lagarde yesterday.
Before Mr Miliband's first question, the Prime Minister said: "It is worthwhile listening to what the managing director of the IMF said yesterday.
"She said this: 'When I think back myself to May 2010 when the UK deficit was 11% and I try to imagine what the situation would be like today if no such fiscal consolidation programme had been decided, I shiver'.
"That is what she said and we should remember who was responsible for leaving that situation - doubling the national debt, a record deficit, a catastrophic inheritance and one for which we still haven't had an apology."