David Cameron insisted today that Britain's influence in Europe will be maintained despite his dramatic decision to veto treaty changes designed to save the single currency.
Britain was left isolated after all the other 26 EU states at a crucial summit in Brussels indicated they will now sign up to a separate agreement to impose new fiscal discipline on the eurozone.
The Prime Minister's veto was welcomed by jubilant Conservative eurosceptics as a first step towards looser UK relations with the EU, or even withdrawal. One Tory MP hailed him for showing the "bulldog spirit".
But Labour leader Ed Miliband accused him of "mishandling negotiations spectacularly" and warned that Britain would no longer have a seat at the table when vital economic decisions affecting the country are made.
Speaking in Brussels at the end of the dramatic two-day summit, Mr Cameron denied the charge, insisting: "Britain's influence in the EU will be maintained."
He added: "Of course this does represent a change in our relationship. But the core of the relationship - the single market, the trade and the investment, the growth, the jobs that we want to see - that remains as it was."
And he poured cold water on the idea that his defiance paves the way for British withdrawal or a referendum on EU membership.
"Membership is in our interests and I've always said if that's the case I'll support our membership," said the Prime Minister.
"Membership of the European Union is good for us."
Britain's exclusion from the new arrangements looks set to impose further strain on the already-tense coalition between Conservatives and Liberal Democrats at Westminster.
Deputy Prime Minister Nick Clegg was among senior Lib Dems who rejected talk of a rift. He "regretted" the failure to reach agreement overnight, but insisted that the coalition was "united" on Mr Cameron's demands for "modest and reasonable" safeguards to protect British interests.
"I think any eurosceptic who might be rubbing their hands in glee about the outcome of the summit last night should be careful what they wish for, because clearly there is potentially an increased risk of a two-speed Europe in which Britain's position becomes more marginalised, and in the long-run that would be bad for growth and jobs in this country." he warned.
But there was dismay elsewhere in the party, with Lib Dem MEP Chris Davies accusing the Prime Minister of "betraying Britain" and senior peer Lord Oakeshott describing it as "a black day for Britain and Europe".
Mr Cameron insisted that he had followed a "combined position" agreed by Tories and Lib Dems and "cleared absolutely between me and Nick Clegg".
"We agreed that if we couldn't secure something that was in Britain's interests we wouldn't go ahead with a treaty," he said.
Mr Cameron's veto - the first wielded by a British PM to block a treaty - came just before dawn after 10 hours of fraught negotiations failed to produce agreement on the safeguards he was seeking for the City of London and the single market.
"You've got everyone else in the room saying give up your national interests, just go along with what everyone else wants, that would be the easy, comfortable, convenient thing to do," said the PM. "But it wasn't the right thing to do, so you've got to stick to your guns.
"It's very important in politics, in life, in diplomacy, you have a bottom line and you don't cross it."
French president Nicolas Sarkozy said Mr Cameron had made "unacceptable" demands for exemptions from certain financial regulations in return for joining in the "fiscal compact" enshrined in the treaty change.
"We were not able to accept because we consider... that a very large and substantial amount of the problems we are facing around the world are a result of lack of regulation of financial services and therefore can't have a waiver for the United Kingdom," said Mr Sarkozy.
Unconfirmed reports suggested the French president told Mr Cameron: "You can't have an offshore centre taking away Europe's capital."
German chancellor Angela Merkel - the driving force with Mr Sarkozy behind the new accord - said: "I didn't think David Cameron sat with us at the table. We had to get some sort of agreement and we couldn't make compromises, we had to meet tough rules."
Hungary, the Czech Republic and Sweden initially held back from the deal, but later indicated that they will sign up, leaving Britain alone outside the new arrangements.
A new inter-governmental agreement will seek to restore market confidence in the single currency by introducing oversight of national budgets and imposing automatic sanctions on eurozone states which run up excessive debts. All EU states apart from Britain will meet on a monthly basis to monitor its operation.
Mr Cameron said he had received assurances from his Dutch counterpart Mark Rutte that he would not allow single market issues to be discussed at meetings where the 10 non-eurozone EU members are not present.
But there remains the possibility of confrontation over the question of whether the bloc of 26 can make use of institutions, like the European Commission and its officials, established for the benefit of all 27.
Downing Street said the EU institutions would have to "prioritise" the interests of the 27, but Commission President Jose Manuel Barroso dismissed suggestions that the new group would be legally blocked from using them.
European markets responded with calm to the row, with shares holding firm and even rising slightly over the course of the day.
But Mr Miliband said: "It's a terrible outcome for Britain because we are going to be now excluded from key economic decisions that will affect our country in the future.
"Frankly, David Cameron mishandled these negotiations spectacularly. He has spent many months, not really promoting the national interest, but more interested in dealing with the splits in his own party. That has served Britain very badly and I fear for the consequences for our country."
London Mayor Boris Johnson, who has been a vocal opponent of eurozone fiscal union, said Mr Cameron had "played a blinder", while Tory MP Robert Halfon hailed him for showing "bulldog spirit".
Prominent Conservative eurosceptics applauded the Prime Minister's defiance and urged him to go further in reshaping Britain's relations with Europe.
Bill Cash, the chairman of the Commons European Scrutiny Committee, said the UK was now on a "path towards renegotiating in a fundamental way the whole of our treaty relationship with the EU".
And Tory MP Douglas Carswell said: "The inexorable logic... is that Britain now heads towards a Swiss-type relationship with Euroland."
UK Independence Party leader Nigel Farage said Mr Cameron had put Britain "in grave danger of being on the sidelines with less influence than ever before yet still paying billions of pounds a year for its EU membership".
He added: "We are a step nearer the exit door of the EU. Now David Cameron has to bite the bullet and let the British people have a say on continued EU membership by calling a referendum."
- More about:
- Czech Republic
- Euro Area
- Global Politics
- Nicolas Sarkozy