Prime Minister David Cameron threatened to veto an EU budget deal if it does not include further cuts, but his position was undermined in talks early Friday by the prospect of Britain's exit from the bloc.
Cameron arrived in Brussels on Thursday in a bullish mood, insisting he would not back down in pursuing a reduced seven-year budget for the European Union, demands which caused the last summit in November to collapse.
But as the negotiations between the 27 EU leaders went into the night, his pledge last month to hold a referendum on Britain's EU membership, with the possibility that it might leave, appeared to be causing problems.
Martin Schulz, the head of the European Parliament, urged against giving into London's demands, particularly as the budget "would cover a time span during which at least one member state has said that it may leave the European Union".
This sentiment was echoed around the leaders' negotiating table, including by Italian Prime Minister Mario Monti, according to a European negotiator.
Cameron's aides insisted they were not aware that the talks had included a reference to a so-called "Brexit", a possible outcome of the in-out referendum on Britain's membership of the EU planned by 2017.
Last year, Cameron refused to accept the trillion-euro budget on the table, despite EU President Herman Van Rompuy cutting it back to 973 billion euros ($1.32 trillion) under pressure from London.
Arriving in Brussels on Thursday afternoon, the prime minister said his position had not changed, insisting the EU could not be immune from the austerity measures being implemented across the continent.
"When we were last here in November, the numbers that were put forward were much too high. They need to come down. And if they don't come down, there won't be a deal," Cameron told reporters.
The prime minister, who is facing the possibility of a triple-dip recession at home, is pushing to cut "tens of billions (of euros) off where we were in November", a British government source said before the summit talks began.
Cameron has sought the support of other net contributors to the EU, including Germany, and had a pre-summit meeting with leaders of northern European nations Denmark, Sweden and the Netherlands.
But his demands have again put him on a collision course with his European partners, particularly France, which has warned against cutting spending on investment at a time when 26 million people are unemployed across the EU.
Cameron had been due to meet French President Francois Hollande for pre-summit talks, along with German Chancellor Angela Merkel, Van Rompuy and European Commission President Jose Manuel Barroso, but Hollande did not attend.
The French leader had earlier told reporters that "if Europe, seeking to reach a compromise at any cost, should abandon its common policies, forget farming and ignore growth, I will not agree".
Cameron's promise of a referendum on EU membership last month won him plaudits in Britain, especially with elements of his Conservative party who have long been calling for powers to be returned from Brussels to London.
But many EU leaders are growing impatient with what they view as Britain's continued demands for special treatment, now backed up with a threat of exit.
Memories are also still fresh of a summit in December 2011 when Cameron found himself isolated after vetoing a fiscal pact aimed at tackling the crisis in the eurozone, of which Britain is not a part.
Cameron will need his European allies to help him push through the reforms he outlined in his speech on January 23, when he made the case for Britain's place in Europe but warned that its unwieldy institutions needed to change.
The prime minister has targeted the Brussels bureaucracy for the bulk of the budget cuts, as well as a planned 50-billion-euro investment in transport, energy and digital infrastructure.