Prime Minister David Cameron has been criticised for "isolating" the UK from the EU after he vetoed a crucial treaty designed to deal with the eurozone crisis because it was "not in Britain's national interest".
The treaty governing all 27 EU members is now likely to be abandoned, but the 17 eurozone countries will continue to negotiate a separate stability pact, and nine of the 10 EU members not in the single currency have chosen to endorse that process.
The UK will be the only EU member left outside the deal, the Council of Europe has indicated, despite earlier suggestions that Sweden, Hungary and the Czech Republic would not take part.
The move was criticised by Labour leader Ed Milliband, who said that Cameron had "spectacularly mishandled" the negotiations. Some Lib Dems also attacked the decision, with LibDem MEP chief whip Chris Davies saying that it had left the UK "isolated".
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Countries who sign up to the stability agreement are likely to be forced to have balanced budgets, and a structural deficit of not more than 0.5% of gross domestic product.
The deal also includes sanctions for nations if their deficit is larger than 3% of GPD.
German Chancellor Angela Merkel said that the EU had "learned from the mistakes of the past".
In a press conference on Friday she said: "The British were never part of the euro, they had an opt out from the beginning so we are familiar with the situation.
"We couldn't make a lousy compromise for the euro but we had to set up hard rules. That's how it was. But that will not stop Europe going forward together on other issues."
European stock markets appeared to react positively to the summit, rallying in early afternoon following a choppy morning.
After a 10-hour marathon of negotiations in Brussels overnight, David Cameron told journalists he could not present the deal to parliament with a clear conscience.
"We want the eurozone countries to come together and solve their problems," he said. "But we should only allow that to happen within the EU treaties if there are proper protections for the single market, for other key British interests.
"A treaty within a treaty without safeguards wasn't right for Britain. It is not easy when you are in a room with other people who all want to press ahead and say 'forget about your safeguards, forget about your interests, let's sign up to this together'. It's the right thing to say that I cannot do that and that it's not in our interest."
Some commentators have suggested the move could be the "beginning of the end for Britain in Europe" but reaction to Cameron's veto has been mixed.
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Conservative backbencher Mark Reckless said on Friday morning that the move could see Britain become more like Switzerland - a member of the single market but not in the EU.
French President Nicolas Sarkozy said Cameron's demands to block a Europe-wide financial transaction tax, which would hit the City of London meant an agreement "wasn't possible, given the position of our British friends".
Foreign Secretary William Hague told the BBC on Friday morning that the prime minister had sought consensus on using the veto across the coalition, adding Nick Clegg had "absolutely" agreed the decision.
He said the agreement "doesn’t leave us in any way isolated in Europe overall."
While Deputy PM Nick Clegg said in a statement that Cameron's demands were "modest and reasonable", several Lib Dem MEPs and MPs publicly criticised the move - a sign that the deal may hurt the coalition.
Chris Davies, the Lib Dem chief whip in the European parliament, said that Britain had taken "a step towards irrelevance".
In a blog post for Public Service Europe he wrote: "The lies, the bile and the sheer xenophobia that pours from much of Britain's press have shaped public attitudes and strengthened the Europhobes. The latter have had their way. In a world in which the influence of the old powers is diminishing by the day, Britain's prime minister has attacked his closest partners and left our country weaker and more isolated."
Lib Dem MP Martin Horwood tweeted: "Worrying picture emerging in Brussels. Worst scenario is UK, Hungary out; 26 others in. Difficult to maintain UK influence from there."
Labour also hit out at Cameron saying his use of the veto was a "sign of weakness".
Ed Miliband said said the prime minister had mishandled negotiations spectacularly.
Shadow foreign secretary Douglas Alexander told the BBC's Today programme that Britain would no longer be "in the room".
“We’ve got most of the European Union countries signing up to an agreement where Britain will not be present in the room, despite there being very significant decisions being taken within the room," he said.