Britain's demands at last week's European Union summit represented a "risk to the integrity of the internal market" which was impossible for other member states to accept, European Commission president Jose Manuel Barroso said today.
In comments which appeared to show exasperation with David Cameron's negotiating tactics, Mr Barroso told MEPs that talks dragged on into the early hours not because of any dispute over the content of the new "fiscal compact" for the eurozone but because Britain would not accept amendments to the Lisbon Treaty.
He insisted that the Prime Minister's decision to deploy the UK's veto to block treaty change did not amount to a "split" between the 17 euro states and the rest. Friday's accord between 26 EU states was "not an agreement at 17-plus, but an agreement at 27-minus", he said.
Mr Barroso was addressing the European Parliament in Strasbourg as Conservative and Liberal Democrat members of Mr Cameron's Cabinet met face-to-face for the first time to discuss the fallout of last week's events.
The weekly meeting came a day after the depth of their rift over Europe was laid bare by Nick Clegg's decision not to attend the Commons as David Cameron defended his decision to wield the veto.
In an interview given as the Prime Minister received the plaudits of Tory eurosceptics for his refusal to sign up to a new treaty, his Lib Dem deputy said that he had stayed away to avoid becoming a "distraction" and insisted the coalition was "here to stay".
Mr Cameron also indicated a willingness to engage "constructively" with the other 26 EU states on the use of EU institutions to support their new inter-governmental agreement.
But the Lib Dem leader, accused of "cowardice" by one Tory MP and mocked as "spineless" by Labour, admitted he and Mr Cameron "clearly do not agree on the outcome" of last week's EU summit.
He renewed his warning that leaving Britain isolated was "potentially a bad thing for jobs, a bad thing for growth and a bad thing for the livelihoods of millions of people in this country".
Mr Barroso told MEPs that he, European Council President Herman van Rompuy and Euro Group President Jean-Claude Juncker put forward a proposal last Thursday for treaty change to introduce new fiscal discipline, which would have applied only to the eurozone but required the approval of all 27 EU members.
"As you know, one member state was opposed to amending the Lisbon Treaty," said Mr Barroso.
"The United Kingdom, in exchange for giving its agreement, asked for a specific protocol on financial services which, as presented, was a risk to the integrity of the internal market.
"This made compromise impossible.
"All other heads of government were left with the choice between paying this price or moving ahead without the UK's participation and accepting an internal agreement among them."
Mr Barroso said that in search of compromise, he tabled a clause which made clear that the measures in the fiscal compact applied only to the eurozone and must not undermine the single market or permit any discrimination against non-euro states.
But he added: "Unfortunately, that compromise proved impossible and so it was not possible to have a solution that could allow all 27 member states to agree in the framework of current treaties."
The Commission President told MEPs: "Fortunately, we have not seen a split in the EU between the 17 and the other 10 ... This is not an agreement at 17-plus, but an agreement at 27-minus.
"Last week, most heads of state or government of the member states showed their willingness to move ahead with European integration towards a fiscal stability union. They showed that they want more Europe, not less."
Discussion of the future of Europe will resume in the Commons later after Northern Ireland's Democratic Unionist Party (DUP) chose it as the subject of its opposition day debate.
After almost 90 minutes, members of the Cabinet filed out of Number 10, most giving smiles to the media but none offering comment on the lengthy meeting.
But Mr Zahradil insisted Mr Cameron was no different from other key leaders: "What he did was just a defence of his country's national interest, in the same way as (French president) Sarkozy and (German chancellor) Merkel did, because they pretend they were speaking on behalf of Europe, but they were speaking on behalf of themselves."
Mr Zahradil told the chamber: "You have no reason to criticise the United Kingdom or its Government."
Mr Farage said: "David Cameron did what he had to do - he was forced into an impossible position, but he gained no concessions whatsoever.
"We simply have no friends in the room: they want our rebate ... the European debate has now started in earnest and Cameron does not know what he has unleashed."
The Ukip leader said the British mistake was to believe that it needed influence in Europe and that "we can change things".
Mr Farage said "We go on paying you £50 million a day, we have helped your bailout fund even though we are not in the eurozone, we give you 80% of the fish stock that swim in our waters, we have applied every European rule - all that to gain influence.
"And when a British Prime Minister goes to a summit with a very modest proposal to protect a British industry, a snarling Sarkozy tells him where to go and he is without a friend in the room: some influence!"
Mr Farage continued: "Well, you've decided to go off on the Titanic and we are in the lifeboat - but now we're threatened with a bow wave: financial markets legislation is going to be imposed on Britain and we will have no influence over it whatsoever.
"We are going to get out of this union - the first EU country to get its freedom back - and then we'll have influence in the world while you lot head for disaster: it is going to happen."
The leader of Mr Cameron's Tory MEPs, Timothy Kirkhope, urged calm: "Now is not the time for hysteria, swagger or melodrama on any side. We should analyse events coolly and calmly."
He said the UK wanted a solution to the eurozone crisis "but not at the expense of the single market because competitiveness remains the key".
He went on: "We are still a full member of the European Union and will remain so. We have major trading currency to protect. It make sense to strengthen the eurozone rules - but it makes little sense and seems unfair not to protect the City of London."
Leader of Britain's Labour MEPs Glenis Willmott accused Mr Cameron of "trying to save his friends in the City and not (save) British jobs and growth".
She said: "Friday was not a good day for Britain and not a good day for diplomacy. Mr Cameron has left Britain high and dry. This was a catastrophic failure of his leadership. and if there is one party standing up for Britain, it is the Labour Party."
Ms Willmott said the Liberal Democrats had to take responsibility too, saying: "They have let this country down big time."
Mr Cameron's official spokesman said Cabinet discussed the EU issue for about an hour.
"It was a good conversation," said the spokesman. "Clearly there are differences of views in the coalition but also a lot of common ground, particularly around the need to push ahead on the single market and for the eurozone to address the debt crisis."
At the end of the debate Mr Barroso expanded on the UK position in the EU, saying: "It is important to put the UK relationship with the rest of the EU in its proper context.
"Emotions are what they are but I think as some of you (MEPs) have mentioned it is important to see how we can get out of a situation that was indeed unfortunate.
"I welcome the statement yesterday by Prime Minister Cameron that he intends to continue to pursue a positive policy of engagement in the EU on a whole range of issues, including growth and economic reform, smart regulation, fighting climate change and the development agenda.
"I sincerely believe that we have a joint interest to agree among all of us. I think it is in all of our interests to have a UK government that fully engages with the other member states and the European institutions."
Mr Barroso continued: "Indeed, it is the European institutions that are the best guarantee that the interests of all member states, including the UK, will be fully respected.
"It is precisely through the European institutions and in full respect of the Community method (of making involving Commission, European Parliament and governments) that we can avoid any kind of split, any kind of directorium, any kind of deviation that will be negative for the overall interest of the Union and of each one of member states.
"I therefore hope that we can work constructively with the UK Government to make sure that the fiscal compact now agreed dovetails neatly with the EU treaties so that the interests of all member states and the European institutions, including this Parliament are respected."
Mr Cameron's spokesman said around half of the Cabinet contributed to the discussion and the atmosphere was "the same as usual".
He added: "There's an understanding that both parties come from different positions on the issue of Europe. That was clear at the time the Coalition was formed."
Asked if there would be any attempt to bolster the role of the Deputy Prime Minister in future European Council negotiations, he said there was "one seat and that is the seat for the head of state for the country".
But he said there was "some discussion" on the process for future negotiations because Coalition Government made it "more complicated".
"Clearly, we will have to think about that process and how we do things.
"The negotiating strategy was agreed with the Deputy Prime Minister. The DPM was on the phone to other European counterparts on Wednesday and Thursday setting out our position, so he was involved."
He added: "We do thing they are reasonable demands.
"We were not asking for an opt out, we were asking for a level playing field."
Conservative backbencher John Baron urged Mr Cameron to renegotiate the UK's relationship with the EU so that it is more like that enjoyed by Switzerland.
Mr Baron told BBC Radio 4's World at One: "I fundamentally believe that the veto should not be the end of the matter, but should be the start of a process to recalibrate our relationship with the EU."
Asked for his advice to the Prime Minister, the Basildon and Billericay MP said: "Please think about doing what the vast majority of this country want and that is to renegotiate our relationship on the basis of free trade, competitiveness and growth and move us away form political unions and dead-weight regulation, which is costing this country far too much.
"(This is) a relationship, by the way, that isn't just in Utopialand. It exists already in such countries as Switzerland."
In its Commons motion, the DUP commends the Prime Minister's exercise of the veto as "a vital means of defending the national interests of the UK" and points to "the desire of the British people for a rebalancing of the relationship with our European neighbours based on co-operation and mutually beneficial economic arrangements".
A Labour amendment renews Opposition complaints that Mr Cameron acted in narrow party, not national, interest and secured no additional safeguards and concludes that "isolation achieving only defeat is unforgiveable".
Any vote will be a test for some Liberal Democrat MPs who are subject to the same three-line whip to back the Government as their Conservative colleagues.
In what will be seen as a dig at the Prime Minister's use of the veto, Energy Secretary Chris Huhne lavishly praised the effectiveness of EU countries negotiating in harmony at the Durban climate change talks this week.
Those talks overran by almost 36 hours but finally resulted in agreement to negotiate a legally-enforceable treaty on cutting emissions by 2015.
Reporting back on the process to the Commons energy and climate change committee, he told MPs: "We got a lot out of this as a result of the unity that we have displayed as a European Union.
"We would certainly not have been able to achieve what we've achieved without that unity."