UK isolated from new Europe treaty; Cameron vs Sarkozy on City rules

Prime minister David Cameron has caused the EU to fracture after refusing to sign up to a new treaty over concerns about financial services regulation.

Attempts to get all 27 EU states to approve a new deal failed during overnight talks in Brussels. French leader Nicolas Sarkozy said the 17 eurozone states and other EU members would work on a separate pact instead, in a bid to restore the credibility of the euro.

The UK and Hungary will play no part in a new inter-governmental treaty, while Sweden and the Czech Republic will consult their parliaments before making a decision.

Cameron used his power of veto after EU leaders, let by Sarkozy, refused to bow to his demands for special safeguards for the City of London.

The Prime Minister had said the issue was the price of his support for embedding new rules for the eurozone into EU treaties. He said it was vital to protect Britain's financial services from the power of the new fiscal bloc, the Times reports.

Although he was warned his stance would push the eurozone countries and others to make their own rules outside the EU, he said his conscience had not allowed him to agree.

Cameron said: "Where we can't be given safeguards, it is better to be on the outside.

"It's not easy when you are in a room with everyone saying, 'forget about your safeguards'. I have to say, it's not in our national interest, I don't want to put it before my parliament, I couldn't do that with a clear conscience."

The plan is for the 17 eurozone countries, together with six who are outside the single currency, to agree the new fiscal rules in a separate inter-governmental agreement to be unveiled by March.

Cameron said he had insisted EU institutions, such as the Commission and the European Court of Justice, should continue to work for the 27 and not just the 23.

He said Britain should be relaxed about the outcome because different parts of Europe already ran at different speeds. He added Britain would never join the euro while many of the other countries outside the eurozone did.

President Sarkozy of France said: "The decisions taken are going to change radically the way the eurozone functions, and Europe functions. David Cameron requested something which we all considered was unacceptable.

"We couldn't have a waiver for the UK and in my view it would have undermined a lot of what we have done to regulate the financial sector."