David Cameron is planning to face down Tory Eurosceptics and stop short of demanding the repatriation of social and employment laws at Thursday's EU summit, which is designed to prevent the collapse of the eurozone.
As Nicolas Sarkozy and Angela Merkel called on all 27 EU leaders to agree to a revision of the Lisbon treaty in order to enforce tough new fiscal rules in the eurozone, the prime minister indicated that his main aim would be to protect the City of London.
Cameron is facing intense pressure from Eurosceptic Tories to use the EU summit to repatriate powers from Brussels.
Douglas Carswell, a Eurosceptic Tory backbencher, said the proposals by Germany and France for a new EU treaty served as an "unprecedented opportunity" to alter the UK's relationship with the EU, and that any change should be put to the British people in a referendum.
But Simon Hughes, the deputy leader of the Liberal Democrats, insisted there were no plans to transfer power and therefore no need for a referendum, as laid out in the coalition agreement.
Under the European Union Act, passed into law in July, a referendum will be held only if significant UK powers are transferred to the EU.
Iain Duncan Smith, the work and pensions secretary, suggested on Sunday that Britain should hold a referendum if EU leaders agree to "major treaty change".
One ally of Duncan Smith made clear that Eurosceptics are determined to use the negotiations this week to rebalance Britain's relationship with the EU. "We do not accept the prime minister's argument that the changes will only affect the eurozone. Of course the changes will have an impact on Britain.
"We also don't accept the prime minister's argument that we should wait for what he calls a wholesale treaty negotiation in the future to ask for the repatriation of powers. Negotiations don't come much bigger than this. We should get stuck in."
But the prime minister made clear that he would table modest demands at the EU summit, which opens in Brussels on Thursday evening.
Cameron was speaking shortly after Merkel and Sarkozy said they hoped to agree a revision of the Lisbon treaty among all EU members.
The French president and German chancellor said they were prepared to broker a deal among just the 17 members of the eurozone if the 10 "outs" – member states outside the euro – were unable to agree. This was believed to be aimed at Cameron, who has caused some alarm in Berlin and Paris by suggesting that he would demand concessions as the price for Britain's agreement.
The prime minister said he would aim to be constructive in the negotiations and would focus on safeguarding Britain's position in the single market.
"If there is a treaty at the level of 27 – if that passed powers from Britain to Brussels, there would be a referendum. If it didn't pass powers from Britain to Brussels, I would still want to make sure that British interests were pursued and there are very important things we want to safeguard, not least the single market, not least the importance of financial services and other issues too. But it may well be that there isn't a treaty at the level of 27 and if that is the case a different set of circumstances will appear.
"If there is treaty change in Europe then we will make sure that Britain gets something in order to enhance, protect, defend and promote our national interest in Europe. That is absolutely key … For my part Britain will remain outside the euro, we will defend our national interest. If there is treaty change at the level of 27, then Britain has its desires and requests to make sure that our relationship with Europe is properly managed. But we will have to see what happens when we get to the point of those discussions on Thursday and Friday."
He said it was in Britain's interests for the eurozone to be stabilised. "Above all, we have to remember this. While we are not in the euro, while we are not going to join the euro, what is happening on our doorstep makes a big difference to us. We want these countries to resolve the eurozone crisis. It is having this chilling effect on our economy. The longer this crisis goes on the worse that effect is."
In a rebuff to Duncan Smith, Cameron indicated that he did not expect the negotiations to trigger a referendum. "On the referendum, our approach is very simple. We have legislated now so it is impossible for a British government to pass power from Britain to Brussels without asking the British people in a referendum first. As prime minister, I am not intending to pass any powers from Britain to Brussels so I don't think the issue will arise."
But Carswell told BBC Radio 4's Today programme on Tuesday that the people "making our negotiations on our behalf" must accept that the outcome of a new deal must be "put to the people".
"Merkozy has talked about this treaty change refounding the European Union – this is an unprecedented opportunity for us to get the deal that we want. The issue is can we trust ministers and mandarins to negotiate the deal on our behalf – I believe not. The only way we can get the deal that is in the national interest is if ministers and mandarins know that the result has to be put to the people in a referendum," he said.
"The coalition agreement is the product of politicians negotiating at their convenience. What is important is to recognise that all three parties deliberately cultivated the impression in the minds of the electorate that they would give people a referendum."
But Hughes insisted the coalition deal had clearly stipulated the trigger for a national poll.
He told Today: "The coalition agreement clearly had more foresight than we might have anticipated because everything is very clear, was negotiated, and the outcome is clear. Firstly, that we want to be a positive participant in the European Union, and that must remain and we have much yet to do to make Europe more competitive, which is good for jobs.
"Secondly, we will ensure there is no further transfer of sovereignty or powers from the UK to the European Union. And then the crucial commitment, that we would amend the 72 European Communities Act so that any proposed future treaties – and these are the key words– that transfer areas of powers and competencies would be subject to a referendum on that treaty – a referendum lock.
"And we have done that. We have put through parliament the legislation which means that if there was to be any transfer of power from us to the European Union, there would be a referendum.
"In all the scenarios [possible this week] … there is not any proposal that there would be such a transfer."
Andrea Leadsom, the Tory MP who is co-chair of the all-party parliamentary group on European reform, gave a guarded welcome to Cameron's approach. Leadsom, who was one of 81 Tory MPs to rebel against the government in October to vote in favour of a referendum on British membership of the EU, said: "I agree if the government is saying now is the time to protect the City. If we are on the brink of a banking collapse it is in the UK's interests to protect the financial system [by agreeing to treaty change]. But I hope to see a mark in the sand that Britain will want to see some adjustments to protect British interests. It does not need to be tub-thumping, just a mark in the sand."
The prime minister's spokesman expanded on Cameron's remarks that stabilising the eurozone was Britain's first priority in the negotiations. "The first thing that is in our interests is that there is a stable eurozone and one that deals effectively with the debt crisis that is currently endangering the eurozone. It is in our interests to make sure that the single market is protected and that European countries deal with their underlying competitiveness issues," he said.
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