The Prime Minister again rejected calls for a referendum on Britain's future in the EU despite French and German demands for a fresh power grab by Brussels.
In a nightmarish twist for the Prime Minister, Mrs Merkel and Mr Sarkozy declared that they plan to ask every member of the EU, including the UK, to sign up to a new European treaty at a summit later this week and press ahead on their own if any say no.
The leaders of France and Germany joined forces to call for a blueprint that would automatically punish countries that use the euro if they violate tough budget rules.
Their pincer movement leaves Mr Cameron in the difficult position of either having to infuriate Tory MPs by allowing them to go ahead, or being blamed by other EU leaders for risking an economic catastrophe across Europe if he puts obstacles in their path.
With fears over the failure of EU nations to get to grips with their debts threatening to engulf the single currency, EU president Herman Van Rompuy is warning the survival of the euro will be at stake at a crunch summit starting on Thursday.
Last night S&P put Germany, France, the Netherlands, Austria, Finland and Luxembourg on a creditwatch negative warning, meaning their prized AAA ratings could be cut to AA+ within 90 days, according to EU sources. EU nations with lower ratings were warned of further downgrades.
The move and in particular the inclusion of Germany sparked panic in the financial markets and the euro slammed into reverse having spent much of the day in positive territory.
A downgrade to one or all of the AAA countries would drive up borrowing costs and threaten the ability of the single currency bloc's strong core to bankroll the bailout of the weak periphery.
It could shatter already fragile confidence in the single currency and its creaking banking system and plunge the region deep into recession.
Louise Cooper, markets analyst at BGC Partners, said: We are drowning in a sea of eurozone sovereign debt and the market is worried about Germany underwriting the whole of the eurozone.
Analysts at PricewaterhouseCoopers warned a series of defaults among the regionÕs most indebted nations would trigger a prolonged recession.
Economic output in the region would fall by 5 per cent, according to the report, tipping Britain back into recession with a slump of 1 per cent in 2012 and 0.2 per cent in 2013.
Downing Street said the priority had to be stabilising the eurozone, rather than using negotiations to try to repatriate powers from Brussels to Westminster at this stage.
Mr Cameron insisted the proposals would not warrant a referendum in the UK because they would only apply to countries in the euro.
ÔWe have legislated now so that it is impossible for a British government to pass power from Britain to Brussels without asking the British people in a referendum first, he said.
ÔAs Prime Minister I am not intending to pass any powers from Britain to Brussels, so I donÕt think the issue will arise.
His position sets him on a collision course with Eurosceptic MPs in his own party, who insist standing back and allowing the eurozone to move towards fiscal and political union is acutely dangerous for the UK.
Tory Eurosceptic Bill Cash, who chairs the Commons European scrutiny committee, said:
"This is a major treaty change whether it is for the eurozone 17 or the EU 27, because it fundamentally changes the relationship of Britain to the European Union,Õ he said. ÔIt therefore requires a referendum."
Tory MP Conor Burns said: "This is the opportunity finally to get the British dog out of the federalist manger."
France and Germany are proposing automatic penalties for nations breaking budget rules, monthly eurozone summits until the economic crisis is contained and a permanent EU bailout fund.
Mr Sarkozy said: "We don't have time. We are conscious of the gravity of the situation."
Power of the ratings agencies
Credit rating agencies give verdicts on the risk associated with lending to a company or a country.
Founded in 1860, Standard and Poor's is one of the three biggest along with Moody's and Fitch. Its rating of AAA is the safest meaning that lenders and investors can confidently buy the debt of the country involved.
The lower the rating, the higher the risk the investor will not get the money back.
Although they were heavily criticised in the build-up to the financial crisis for giving high ratings to sub-prime mortgage investments, the agencies still carry weight.
Pension funds and other leading investors have rules about what they are allowed to invest in many of them based on these ratings.
- DAILY MAIL
