Backbench demand for EU budget veto thwarts Cameron's bid to set the agenda

Hague to warn that EU could disintegrate because of a lack of democratic mandate

David Cameron's attempt to restore his authority suffered a setback yesterday as he was hit by a new Conservative backbench rebellion over Europe.

The Prime Minister was caught between a rock and a hard place after Tory MPs demanded that he veto the €1 trillion European Union budget for 2014-20, just as he was deserted by key allies, including Germany, in his battle to freeze EU spending.

Tory MPs expressed fears that Mr Cameron is winning the political argument with Labour but in danger of losing the next election because he is failing to get his message over to voters. Some are dismayed that, a week after his widely praised speech to the party conference, he was blown off course by his botched announcement about keeping down energy bills and the long-delayed resignation of Andrew Mitchell as Chief Whip.

Europe has now risen to the top of Mr Cameron's agenda ahead of a summit of EU leaders next month to decide on spending. Two years ago, Germany, the Netherlands and Finland were among countries backing Britain's call for the budget to remain flat in real terms. But yesterday the German government revealed that it is backing a "moderate" increase to about 1 per cent of European gross domestic product, less than the 1.1 per cent proposed by the European Commission, but a move which leaves the UK isolated.

In the Commons, Mr Cameron pledged that Britain would "stick to our guns". But Downing Street stopped short of saying he would block the EU budget unless spending is frozen, even though he has a veto as it must be approved by all 27 member states.

Mr Cameron, who will hold talks with the German Chancellor, Angela Merkel, in London on 7 November, said neither country was prepared to back further big rises in spending. "I don't believe that German voters want that any more than British voters," he said. In a speech in Berlin today, the Foreign Secretary, William Hague, will warn bluntly that the EU could become "democratically unsustainable" unless countries such as Britain are allowed to regain powers from it rather than cede more control to Brussels.

While insisting the Government is committed to playing "a leading role" in the EU, Mr Hague will say: "Public disillusionment with the EU in Britain is the deepest it has ever been. People feel that in too many ways the EU is something that is done to them, not something over which they have a say.

"People feel that the EU is a one-way process, a great machine that sucks up decision-making from national parliaments to the European level until everything is decided by the EU. That needs to change. If we cannot show that decision-making can flow back to national parliaments then the system will become democratically unsustainable."

He will call for a "flexible" EU which does "not disadvantage those that do not wish to participate in everything". Number 10's refusal to declare its hand on the EU budget fuelled Tory fears of a climbdown. John Redwood, the former Cabinet minister, said: "Some of us would like him [Mr Cameron] to veto any budget which does not cut the [EU] figure substantially, given the chronic state of many European governments' finances."

Another Eurosceptic, Douglas Carswell, warned: "Mr Cameron is simply not going to get a majority in the Commons unless he recognises there can't be a real-terms increase in the EU budget." Tory backbencher Nick de Bois said the Government was struggling to communicate its policy successes. "The real problem is we're actually winning the policy arguments but we're losing some of the politics that go around it," he said.