Cameron feels the heat of meltdown on Continent

As well as further weakening Britain's already anaemic growth, the crisis in the eurozone threatens to create a major political headache for David Cameron. The Prime Minister faces a dilemma over whether to risk a rift with Conservative backbenchers or his Liberal Democrat coalition partners over Britain's stance when a new European treaty is devised to allow the 17 nations in the euro to adopt fiscal union.

At the first meeting of a new Eurosceptic group on Monday, 120 Tory MPs agreed to draw up a "shopping list" of powers they want to see returned from Brussels to London in the EU negotiations. One said the Government had a "blank page" for its Europe policy and that the MPs are determined to fill the vacuum.

The new group plans to turn itself into an all-party network by attracting Eurosceptic Labour MPs and even one or two Liberal Democrats. It will also urge Mr Cameron to press for the EU's commitment to "ever-closer union" to be dropped from the new treaty; greater devolution of power to the lowest possible level, and to allow national parliaments to strike down judgments by the European Court of Justice.

Mr Cameron had hoped to keep a lid on an issue which destabilised the Thatcher and Major governments until after the next general election. But the eurozone problems mean a new treaty could be signed in about two years, putting the EU firmly on the domestic agenda. Senior Liberal Democrats warned that they would maintain their opposition to the repatriation of powers from Brussels. "Our position is not going to change," said one Liberal Democrat source.