Delegates rejected an attempt by Vince Cable, the party's Treasury spokesman, and Nick Clegg, a leading moderniser, to limit European Union spending to 1 per cent of national income. An impassioned debate revealed a major split within Liberal Democrat ranks, emblematic of the battle for the party's heart between right-of-centre modernisers and the traditional Liberal left.
Rebel Liberal Democrat MEPs openly clashed with the party's Westminster MPs, arguing that they should not impose an arbitrary cut in EU spending and accused the party of pandering to Eurosceptics. Party delegates exposed the division within the party by narrowly defeating the leadership on a show of hands.
The debate over the future direction of the party will continue today when delegates debate plans to privatise the Royal Mail.
Yesterday's vote on Europe sparked anger from the party's front bench. Mr Cable branded delegates "bloody-minded", arguing that the decision to reject a cap on EU spending damaged the party's ability to gain credibility for its tax and spend policies.
He warned: "The only people who will be pleased are the Eurosceptics; this will confirm their worst suspicions."
Sarah Teather, the party's local government spokesman, added: "Sticking to your principles is one thing, being self-indulgent is another. Giving the EU with its democratic deficit a blank cheque does not show responsibility or credibility."
But delegates lined up to attack the spending limit, claiming it would give succour to Eurosceptics and lead to deep cuts in EU grants for Britain's most deprived communities.
Leading the attack, Chris Davies, leader of the Liberal Democrats in the European Parliament, warned: "What's the agenda behind this proposal? What signals does it send out? I hope I'm wrong, but I see an attempt here to move the party in a Eurosceptic direction and I want your help to resist it."
He won loud applause as he added: "This is not a party of xenophobes and of little Englanders. It is a party of principle and internationalists ... We need this conference to send out a clear message for the future. We are not going down the Tory road of Europhobia and division. We nail our colours firmly to the mast."
But Mr Clegg told delegates: "It is simply incorrect to describe this as some savage attack on the European Union's core functions.
"Pushing for reform in a budget which even ardent pro-Europeans will admit is sometimes managed in a somewhat irrational fashion can hardly be considered to be a lurch in one dramatic political direction or another. It is perfectly in line with the Liberal Democratic approach to the European Union, which is stridently pro-European but not shy in pointing out where reform is needed."Reuse content