Cameron’s move is said to have angered French president Nicolas Sarkozy and prompted an exchange of harsh words.

Britain’s prime minister had asked for concessions for the City of London in exchange for backing a new “fiscal union” among euro countries, saying he could not allow a  treaty that would undermine the UK’s position in the single market.

Attempts to alter the treaty governing all 27 countries have now been abandoned. Instead, the 17 members of the eurozone will create a separate treaty, joined by eight of the ten non-euro countries.

The treaty will include tougher economic sanctions in an attempt to restore single market credibility and stability.

Britain’s was joined by Sweden, the Czech Republic and Hungary in choosing not to be part of the new treaty.

The Prime Minister has been accused of leaving Britain isolated, but he claimed: “I had to pursue very doggedly what was in Britain’s interests, which is very difficult in a room where people are pressing you to sign up to things because they say it is in all our interests.”

He said that despite Britain’s veto, relations with other EU countries remain good. “There were strong disagreements but it was good-natured. People understood each other. That relationship will be maintained and will work well, but at the end of the day I made my judgment that it was not in Britain’s interests (to take part),” the prime minister said.

Cameron had stated that he would not sign the treaty unless it could be guaranteed that any transfer of financial power from a national regulator to an EU regulator would be subject to a veto and that the European Banking Authority should remain in London.

However Sarkozy said: “We were not able to accept (the British demands) because we consider quite the contrary – that a very large and substantial amount of the problems we are facing around the world are a result of lack of regulation of financial services and therefore can’t have a waiver for the United Kingdom.”