Cameron isolated as leaders fight for the EU's survival

Veto threat unless City of London is not undermined by plan to forge fiscal union in eurozone

David Cameron looked isolated last night as other European Union leaders rebuffed his demand for special safeguards for Britain in return for approving a deal to rescue the euro.

As a make-or-break EU summit got under way in Brussels, the Prime Minister repeated his threat to veto any agreement to forge a "fiscal union" in the eurozone if it undermined the City of London.

Several countries accused Britain of overplaying its hand. They doubted that Mr Cameron would risk scuppering their moves to end the euro turmoil, and warned that if he did kill off an agreement among all 27 EU members, the 17 eurozone nations would merely do a deal among themselves.

A 45-minute meeting between Mr Cameron, the German Chancellor Angela Merkel and the French President Nicolas Sarkozy before the full summit failed to break the deadlock. The Prime Minister warned that, unless he returns from Brussels with concessions, Tory Eurosceptics could defeat a Bill to set up a permanent bailout mechanism for the euro which is due to be approved by Parliament next year.

Mr Cameron's room for manoeuvre in Brussels was limited by further pressure from Conservative Eurosceptics who want him to claw back some powers from Brussels and call a UK referendum on the proposed new EU treaty.

Edward Leigh, a prominent Tory right-winger, warned Mr Cameron not to turn into a modern Neville Chamberlain, who returned home with a peace treaty with Adolf Hitler a year before the Second World War.

He said: "We have had enough of reading of British prime ministers over the past 20 to 30 years in the days preceding a summit that 'they will stand up for the British national interest' and then coming back from a summit with a kind of Chamberlain-esque piece of paper saying, 'I have negotiated very, very hard. I have got opt-outs on this and that and I have succeeded in standing up for British interests'. That piece of paper is not worth the paper it is written on."

Martin Callanan, leader of the Conservative MEPs, defied Mr Cameron by calling for the public to have a vote. He said: "If there is any treaty change which creates European fiscal union then clearly that will radically affect the UK and that should be put to a referendum. That is what democracy demands, because we would be creating a fundamental change to the EU and our relationship with it."

As the 27 leaders got down to business over dinner last night, they discussed a fast-track agreement for the 17 to rein in excessive budget deficits, with the formal EU treaty change on economic governance sought by Germany to follow later. But many important differences remained to be resolved. France would be happy with a deal among the 17, and Germany wants to lock in all 27 EU members in order to avoid creating a two-speed Europe. Most countries would prefer a 27-nation agreement, as one limited to 17 would create a two-speed Europe with the 10 "outs" losing influence.

Mr Cameron, who again threatened to wield his veto yesterday, said on arrival: "These are important talks and we need obviously to get that stability in the eurozone that is good for European countries, good for Britain as well, but also we need to protect Britain's interest as well. Those are my aims and that is what we will be discussing."

One option being discussed would be to offer Britain a pledge to preserve the single market and that all member states would have to be happy with future financial services legislation. But that might not satisfy Tory Eurosceptics. Jean-Claude Juncker, the Prime Minister of Luxembourg, who chairs the eurozone finance ministers group, said: "I don't want the United Kingdom setting aside entire pages to say the UK will not do what all the others have to do. I will not accept that."

Alexander Stubb, the Finnish European Affairs Minister, said: "The UK is not a central player in this game right now because it is not in the euro." Jose Manuel Barroso, the European Commission President, said: "All the world is watching us. And what the world awaits from us is not more national problems but European solutions."

Europe's warring factions... and what they're fighting about

The Quick Fixers vs The Treaty Changers

Herman Van Rompuy, President of the European Council (the 27 leaders including David Cameron), came up with a wheeze in which the 17 countries in the eurozone could rush through a "protocol" to the existing EU treaties creating fiscal union so that national parliaments would not need to approve a new treaty. The idea was backed by Ireland, which would almost certainly have to hold a referendum on one. But it went down like a lead balloon with Angela Merkel, who has led the demands for a formal treaty change to show public and political opinion in Germany that the eurozone is signing up to budgetary restraint, with knobs on.

The Federalists vs The Nationalists

Angela Merkel wants EU institutions, including the European Commission and European Court of Justice, to play a key role in enforcing the tougher rules on deficits and debt and imposing penalties. The Netherlands wanted a Brussels commissioner with power to expel member states with excessive deficits from the eurozone. But other leaders, led by France's Nicolas Sarkozy, want national governments to have the final say, in line with the trend towards "inter-governmentalism". Britain is firmly in the French camp. Ireland and Bulgaria, with low rates of corporation tax, will oppose plans to harmonise business taxes.

The Hair Shirt Brigade vs The Solidarity Club

Germany is the driving force behind the move to impose budgetary discipline. It has been reluctant to see the European Central Bank (ECB) and its head Mario Draghi act as a lender of last resort, fearing printing money would fuel inflation. But France and southern European countries put greater emphasis on the EU's principle of "solidarity" and want a bigger financial firewall than Germany. They want the ECB to use its muscle. Yesterday the bank cut interest rates by 0.25 of a percentage point to 1 per cent.

The Democrats vs The Technocrats

The debt crisis has seen elected politicians replaced by unelected technocrats. Lucas Papademos, a former central banker, became Prime Minister of Greece, and Mario Monti, an academic and former European Commissioner, took over from Silvio Berlusconi as Prime Minister of Italy. Both were installed by their country's president. Some critics have asked: what price democracy? And pessimists fear that, whatever the EU's leaders manage to agree this week, the peoples they govern may prove rather more intractable.

Timeline: How we got to the point of no return

May 2010 European leaders establish new bailout fund, called the European Financial Stability Facility (EFSF) to prevent Greece, which is riven by unrest, from going bankrupt.

November 2010 Ireland bailed out by the EFSF.

December 2010 Brussels agreement the establishment of permanent bailout fund called the European Stability Mechanism (ESM) to be operational from 2013.

April 2011 Portugal bailed out by EFSF.

July 2011 European Banking Authority gives clean bill of health to most of Europe's banks. Eurozone leaders agree to increase size of the EFSF and allow it to buy up bonds of Spain and Italy in secondary markets.

October 2011 Brussels agreement to use EFSF to insure new debt issued by distressed governments, such as that of ex-Italian PM Silvio Berlusconi. Plus plan to recapitalise Europe's banks and write down Greece's debts by 50 per cent.

November 2011 G20 summit in Cannes fails to produce plan for China to invest in European bailout fund. No agreement on boosting IMF resources to help it stand behind eurozone.

December 2012 Brussels summit to agree new EU Treaty to impose sanctions on eurozone governments that overspend. Chief drivers of the deal are Angela Merkel and Nicolas Sarkozy.