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Eurosceptic Tories look to capitalise on Cameron's refusal to back treaty

Britain's future relationship with the European Union was under intense scrutiny today in the wake of David Cameron's dramatic decision to veto treaty changes designed to save the euro.

The consequences of the move are still being digested but the Prime Minister is under mounting pressure from heartened Tory backbenchers to entirely renegotiate the UK's membership of the EU.

The fallout from the momentous European Council in Brussels 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, insisting 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".

Britain was left isolated after all the other 26 EU states at a Brussels summit 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".

Speaking in Brussels at the end of the dramatic two-day summit, Mr Cameron said: "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."

But prominent Conservative eurosceptics 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: "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."

At the same time, Britain looks likely to face hostility from other EU members.

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.

Unconfirmed reports suggested the 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 would sign up, leaving Britain alone outside the new arrangements.

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 EC president Jose Manuel Barroso dismissed suggestions that the new group would be legally blocked from using them.

Former Tory cabinet minister Lord Heseltine warned eurosceptics that Britain could not protect its interests by walking away from the European Union.

The europhile backed Mr Cameron's use of the veto, saying "the politics made it impossible", but added: "In saying he wanted to protect the interests of the City, there is no way you can protect those interests by floating off into the Atlantic, frankly."

Lord Heseltine said there would have to be a discussion now about the City's relationship with the eurozone.

Asked whether Britain would inevitably have to leave the EU, he told BBC Radio 4's Today programme: "The issue not what the people accept today, it's what they will accept when they perceive the potential damage to hundreds of thousands of British jobs and tax revenues.

"The voices of the City of London have to become very much louder and their dialogue with MPs very much more acute."

Chancellor George Osborne dismissed the suggestion that Britain would lose influence within the EU, saying the Government had ensured the single market would be discussed by the full 27.

"We have protected Britain's financial services and manufacturing companies that need to be able to trade their products into Europe from the development of eurozone integration spilling over and affecting non-euro members of the EU," he told BBC Radio 4's Today programme.

"If we had signed this treaty - if David Cameron had broken his word to parliament and the public, gone there and caved in without getting the safeguards he was looking for - then we would have found the full force of the European treaties, the European court, the European Commission, all these institutions enforcing those treaties, using that opportunity to undermine Britain's interests, undermine the single market.

"We were not prepared to let that happen."

Asked whether Tory eurosceptics would now want more from the Government in renegotiating Britain's relationship with the EU, he said: "I think people are pleased that a British prime minister stood up for the British national interest.

"They are relieved that a British prime minister did exactly what he said he was going to do."

Mr Cameron hosted a dinner for a number of Tory MPs at Chequers last night at which he was said to have been toasted.

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