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LONDON (Reuters) - Prime Minister David Cameron tried to limit the political damage from an historic break with his European partners, insisting on Monday that remaining a member of the 27-nation EU was in Britain's national interest, despite his veto on a new treaty.
Cameron's decision to oppose a European Union treaty change aimed at tightening fiscal rules for countries using the euro has isolated Britain in the 27-nation bloc and created the biggest rift in his coalition since he took power in May 2010.
The prime minister sparked speculation about Britain's future relationship with the EU on Friday when he appeared to give a less than wholehearted commitment to Britain's place in the bloc it joined in 1973 and with which the island nation has long had an ambivalent relationship.
"Britain remains a full member of the EU and the events of the last week do nothing to change that. Our membership of the EU is vital to our national interest," Cameron told parliament during a noisy debate on last week's summit.
"We are a trading nation and we need the single market for trade, investment and jobs," Cameron added.
Cameron's veto pleased euroskeptics on the right of his Conservative Party but angered pro-European Liberal Democrats, the junior partner in his coalition that he depends on to push through austerity policies to curb Britain's big budget deficit.
Cameron insisted the tensions would not lead to the coalition breaking up even though his deputy, Lib Dem leader Nick Clegg, was glaringly absent from the debate, drawing cries of "Where's Clegg?" from opposition Labour lawmakers.
Clegg, who voiced disappointment on Sunday at Cameron's summit decision despite initially appearing to support it, said his presence in parliament would have been a distraction because of his public disagreement with Cameron.
"I've made it very clear that I think isolation in Europe, when we are one against 26, is potentially a bad thing for jobs, a bad thing for growth and a bad thing for the livelihoods of millions of people in this country," Clegg told broadcasters.
He said he would work to "build bridges, re-engage and make sure the British voice is heard at the top table in Europe," but said the coalition was "here to stay" until the next election due in 2015.
The Liberal Democrats have seen their poll ratings more than halve to just over 10 percent since the election, and Clegg knows that a snap poll would leave them facing another long spell in the political wilderness.
Cameron said Britain could be both a "full, committed and influential" member of the EU but stay out of arrangements that did not protect British interests. "We are in the EU and we want to be," he said.
He said the choice he had faced was a treaty without proper safeguards for Britain's important financial services industry or no treaty. "The right answer was no treaty," he said. "It was not an easy thing to do, but it was the right thing to do."
He said Britain would be "vigorously engaged in the debate" in the months to come about whether the new grouping may use EU institutions intended for all 27 members.
Cameron's spokesman said Britain needed to be clear that the new arrangements would not undermine the EU's single market and said Britain stood by its goal of ensuring a level playing field for its financial services industry.
Labour leader Ed Miliband echoed Clegg, telling parliament the veto was "bad for business, bad for jobs and bad for Britain."
Around half of Britain's trade is with other EU countries and the government estimates that business with its continental partners accounts for 3.5 million jobs.
Martin Sorrell, chief executive of the world's largest advertising group WPP told Reuters that Cameron's decision to veto a 27-nation deal, potentially isolating it within the bloc, "doesn't seem to be the best way."
"Intuitively, it seems to me that it would be better to be on the inside of the tent than the outside," Sorrell said on the sidelines of a conference in London. "It seems to be more about politics than economics."
Cameron won strong backing from his own Conservative Party members, but rejected calls from some for British voters to be granted a referendum on EU membership.
Conservative Julian Lewis had called for a referendum.
"Now that the prime minister has cast his vote on Europe so effectively in Brussels, does he think there is any chance that the British people might one day have an opportunity to do something similar over here?"
Cameron replied that the issue of a referendum did not arise because Britain was not signing a treaty handing over more powers to Brussels.
French President Nicolas Sarkozy joined Cameron's critics, telling Le Monde newspaper he and German leader Angela Merkel had done everything they could to "ensure Britain was on board with this accord," implying Cameron had deliberately scuppered it.
And the EU Economic and Monetary Affairs Commissioner Olli Rehn said Cameron's decision was as much a matter of regret for the British people as it was for Europe.
"We want Britain to be at the centre of Europe and not on the sidelines," he told reporters in Brussels.
At the Brussels summit on Friday, Cameron vetoed a plan for a new EU treaty that would impose closer EU control over national government budgets to curb the bloc's debt crisis.
The other member states, including the 17 using the euro, now plan to adopt a separate pact without Britain, leaving the country potentially alone as never before in the EU, which many Britons have long viewed with distrust.
Additional reporting by Keith Weir, Stephen Addison, Mohammed Abbas, Tim Castle and Stefano Ambrogi; editing by Alistair Lyon