The controversial call came from a multi-millionaire venture capitalist, Adrian Beecroft, whose interests include an online company offering payday loans at huge rates of interest.
Mr Beecroft, who has given more than £530,000 to the Tories under Mr Cameron, was asked by him to examine how employment law could be overhauled to boost economic growth.
To Lib Dem anger and surprise, Mr Beecroft has recommended ditching unfair dismissal rules. Unions were also furious, further souring the atmosphere as ministers try to avert widespread strikes over pension reforms.
Last night Tory sources distanced themselves from the report, saying its findings were unlikely to "see the light of day".
Lib Dem sources called him an "ideological" figure whose conclusions they would not support. One said: "He is a private individual who has produced a report not based on any evidence."
Norman Lamb, Nick Clegg's chief of staff and a former employment lawyer, said it would be "madness" to throw away workers' protections against unjustified sackings.
He added: "It is likely to have the unintended consequence of destabilising consumer confidence at a very difficult time. If every employee in the land faced the prospect that they could be removed arbitrarily, the destabilising effect could be devastating. It would legitimise Victorian employment practices."
Mr Beecroft, worth an estimated £100m, built his fortune through the venture capital firm Apax Partners.
He now chairs Dawn Capital, whose portfolio includes Wonga.com, which offers short-term loans to tide people over until their next pay cheque.
A recent probe by the consumer watchdog Which? found it quoted £36.72 interest on a 30-day loan of £100 – equivalent to a 4,394 per cent annual interest rate. Mr Beecroft was called in by Steve Hilton, the Prime Minister's policy chief, to conduct the "blue skies thinking" on employment legislation.
His arrival has irritated the Department for Business, headed by the Liberal Democrat Vince Cable.
Early reports of Mr Beecroft's conclusions suggested he wanted to scrap parental leave, scale back flexitime working and change maternity pay to lift the burden on business.
A leaked version of his interim conclusions yesterday showed he was focusing on the UK's "terrible" employment laws, which he said let staff "coast along" with little fear of being replaced.
Downing Street said the leak did not show Mr Beecroft's final conclusions. No decision had been taken on whether to publish his final report, a spokeswoman said.
Mr Beecroft's ideas were iwelcomed by the British Chambers of Commerce. Its director-general, John Longworth, said: "Too many companies... tell us dismissal rules and fear of costly tribunal claims stop them taking on staff."
But Brendan Barber, TUC leader, said: "This proposal does nothing for growth... it shows the kind of economy those close to the Prime Minister want to create, in which nasty bosses are given full licence to undermine those trying to maintain decent standards."
Adrian Beecroft: Tycoon leading the sack race
Senior civil servants, the Sir Humphrey heavyweights, sometimes call them the "Daleks of Downing Street". Tony Blair had John "Blue Skies" Birt. David Cameron has "shoeless" Steve Hilton and a new thinker with a growing profile – Adrian Beecroft.
Mr Beecroft, 63, is one of Mr Hilton's "red team" of businessmen supposed to think the unthinkable and write the politically unpalatable.
Mr Beecroft's report for the Prime Minister that "terrible" laws enshrining employment rights are hampering growth will be no surprise to those who know his background. With a City career in global finance and investment spanning years, he turned a £10m venture capital company, Apax, into a long-term private equity player now managing over £20bn in global assets.
There is no mention in Apax's guide to how useful Luxembourg or the Cayman Islands can be. The tax havens were used by Apax in 2008 when it acquired the publisher Emap. Corporation tax in the Caymans? Zero. Offshore tax structures have proven controversial for the Conservatives when used by some of their advisers and donors.
The PM has Mr Beecroft – a significant donor to the Tory Party, he and his wife have given more than half a million pounds to the Tories since Mr Cameron became leader – to now consult on everything from pensions to cutting the NHS. This year Mr Beecroft, who has a personal fortune of more than £50m, recommended a delay in pensions reform; told No 10 that the NHS cuts would have to go deeper; and research support for charities like Cancer Research was unaffordable.
Although Mr Beecroft retired from Apax in September 2008 as their senior investments officer, the company owns or manages healthcare companies such as General Healthcare which stand to benefit from the increased use of the private sector inside the NHS.
Mr Cameron has, so far, kept Mr Beecroft away from Downing St, his thinking instead being filed into the No 10 ether through reports.
James Cusick
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