David Cameron and Nicolas Sarkozy are locked in a confrontation in Brussels over Britain’s demand that any new treaty to enforce eurozone fiscal discipline should also include “safeguards” for the City of London.

The row, which stretched into the early hours of Friday morning, added to a pessimistic mood as 27 European leaders arrived in Brussels for an EU summit intended to arrest the crisis in the eurozone;. the French president, had set the tone warning that Europe risked “disintegration”.

French officials said Mr Cameron’s demands were “unacceptable” while Germany saw them as “problematic”. Jean-Claude Juncker, Luxembourg’s prime minister, said Britain could not “do what it wants in terms of financial regulation”.

Meanwhile EU leaders pushed Angela Merkel, German chancellor, to accede to a plan to give the International Monetary Fund €150bn (£128bn) in new funds that could be used to shore up eurozone countries, while allowing the bloc’s €440bn rescue fund to continue running even when a new €500bn facility comes into place next year. The latter measure would increase the size of the EU’s own resources by about €200bn.

Mr Cameron is under pressure from his own Conservative party to take a tough stance in Brussels, but his list of demands falls well short of a British “opt out” on new financial service regulation that Paris and Berlin believed he was seeking.

Some of Mr Cameron’s eurosceptic MPs will regard his approach as too timid. Edward Leigh, a Tory MP, caused fury in the prime minister’s camp when he said he was tired of British prime ministers returning from Brussels with “Chamberlain-esque pieces of paper”.

Mr Cameron insisted that any agreement to tighten fiscal discipline in the 17-member eurozone should not distort the single market covering all 27 member states. He also wants a separate protocol to protect the City of London from excessive EU regulation, including an agreement to let Britain enforce bank capital requirements that are higher than the proposed European maximum.

Other demands include an agreement that the new European Banking Authority should remain in London and protection from EU regulation of London-based US financial institutions that do not trade with the rest of Europe.

Mr Cameron also wants a written guarantee – making explicit what is already the case – that unanimity should apply to any proposed “user charges” for financial groups, including any variant of the controversial European financial transactions tax.