Germany regards the principle of free movement of labour within the European Union as "not negotiable", a spokesman for Chancellor Angela Merkel has said.
The comments follow reports that Mrs Merkel has warned David Cameron that his drive to curb immigration from other EU states is pushing Britain towards "a point of no return" on the road to exit from Europe.
Downing Street described the report, in news magazine Der Spiegel, as "speculation" and insisted Mr Cameron remains committed to addressing immigration in the renegotiation of Britain's EU membership which he has promised if Conservatives win next year's general election.
The Prime Minister is coming under intense pressure to tighten Britain's immigration controls to counter the rise of Ukip, but has yet to spell out how he would do so. Der Spiegel quoted unnamed sources within Mrs Merkel's office and foreign ministry as saying that if Mr Cameron demanded numerical limits on EU migration, "there will be no going back" and Germany would cease doing all it can to convince Britain to remain a member of the EU
Asked about the report at a weekly press conference in Berlin, Mrs Merkel's spokesman Steffen Seibert said that Germany continued to want " an active and engaged Great Britain within the EU".
Mrs Merkel had made clear that Germany, like the UK, is concerned about the abuse of free movement to claim benefits, said Mr Seibert. But he added: "The general principle of freedom of movement in the European Union is not negotiable".
Downing Street confirmed that the Prime Minister will set out his approach to the question of EU migration before Christmas.
"He recognises the British public have got concerns about the impact of EU migration here in the UK, and he is going to address these as part of the renegotiation," said a Number 10 spokeswoman.
"The Prime Minister has yet to set out his plans about how he is going to approach this issue. What he has set out is his commitment and determination to address it."
Reports suggested that Downing Street is considering proposals from the leader of Conservatives in the European Parliament, Syed Kamall, to block tax credits and other benefits until EU migrants have been contributing through national insurance for at least two years.
But senior Tory backbencher David Davis increased the pressure on Mr Cameron by warning that reform to benefits rules would not be "enough".
"It's got to be a change in the so-called free movement rules to take on board that sometimes one country has an average wage one-eighth of another country and therefore if you don't do something there is going to be a massive flow from one to the other," he told the BBC Radio 4 Today programme.
Chancellor George Osborne insisted Berlin understands UK voters' "disquiet" over immigration.
"David Cameron and the Conservative Party always put Britain's national interest first and we will do what is in the interests of this country and the interests of this country's economy," Mr Osborne told the BBC.
"We have had good discussions with the Germans; I was in Berlin just a few days ago myself.
"They understand the disquiet that is caused amongst British people when you have people coming in from other parts of Europe here, to claim our benefits, who don't necessarily have jobs to go to."
But Nigel Farage insisted the Germans "don't bluff" and claimed Mrs Merkel would prefer British exit to a renegotiation of EU treaties.
The Ukip leader told BBC News: "Mr Cameron was pushed, I think by Ukip's success in Clacton, into extending his renegotiating position into saying we should renegotiate freedom of movement. It isn't going to happen.
"My experience of Brussels politics is that the Germans don't bluff. They are very straightforward, they really do say what they think and Mrs Merkel would rather Britain left the European Union than those treaties started to be unpicked."
Deputy Prime Minister Nick Clegg said Mrs Merkel's reported comments showed that a Conservative-only government following May's election would represent "a huge risk" to the British economy.
Speaking during a visit to a school in London, the Liberal Democrat leader said: "It's clear that the Conservative Party now are within a heartbeat of advocating full withdrawal from the European Union because in their blind panic in seeking to chase after Ukip they are pushing the country further and further towards the exit sign.
"It's a huge mistake for the Conservatives to think they can out-Ukip Ukip. The more they run after Ukip the more they will bolster Ukip."
For Labour, shadow foreign secretary Douglas Alexander said: "These comments by a German government spokesperson reveal that David Cameron is both losing influence and losing allies in Europe.
"His weakness within his own party means he now risks pushing Britain towards exit from Europe altogether.
"The right road for Britain is reform within Europe, not exit from Europe."
A report published by pro-reform thinktank Open Europe called for a new Brussels directive to allow benefit payments only when an EU migrant has lived in a new country for three years.
Under the proposals, migrants would have the right to public health care but the cost would be covered by their home state with any shortfall made up through private health insurance, while children of EU citizens would have a right to access childcare and primary and secondary education.
Open Europe research director Stephen Booth said: "Angela Merkel has consistently made it clear that Germany is very wary of unpicking the fundamental principle of free movement within the European Union. However, Germany and other national governments across the EU would be sympathetic to reforms to access to welfare that concretely address the inconsistencies and perverse incentives undermining public confidence in free movement - not just in the UK but across Europe."
The UK's European Commissioner - Lord Hill of Oaresford - hit out at a dangerous tendency in the UK to see every negotiation with Brussels in black and white terms of "a victory or a defeat".
Giving evidence to the Commons foreign affairs select committee on his first full day in the role, he said there was " strong, widespread support - I would say almost universal support - for Britain to remain part of the EU from our European friends and partners.
"My approach to this job is the head rather than the heart. So far as the head is concerned, I start from the very clear position that I think it is overwhelmingly in Britain's interests to remain part of a reformed EU," he told the MPs.
But he went on: "There can be a tendency, both in Britain and elsewhere Europe, to think and talk in terms of British exceptionalism .
"We slip into it here in terms of our rhetoric sometimes in a way that doesn't always help: everything always has to be a victory or a defeat.
"The relationship between our island history and our politics and our media plays into a certain pre-ordained script."
In fact that was "not the truth at all", he argued, as other countries were constantly arguing their national interests "just as vigorously".
Lord Hill admitted that he had been "scarred for life" from the European battles during his time at Number 10 in John Major's policy unit and as the Tory prime minister's private secretary.
"Of course I was scarred for life. But notwithstanding the scars, it was something that I think was extremely important," he said.
He played down suggestions of tension with new European Commission President Jean-Claude Juncker - whose appointment Mr Cameron campaigned to block.
Mr Juncker " has been extremely supportive and open with me", said the peer, and handed him an economic post in the Brussels' executive, despite the division.
"The fact that I have got this particular portfolio - which is not one I think perhaps everyone would have predicted a Brit getting - is a sign of a willingness ad and intention to work together," he said.