UK left out as 26 EU countries to draft new treaty

Talking to journalists at 5.30am local time - 10 hours after the meeting first started - French President Nicolas Sarkozy, who publicly fell out with British Prime Minister David Cameron at a summit in October, laid the blame firmly at London's door.

"It's our British friends' choice. We respect this choice but they cannot blame us. You cannot on the one hand be asking for an opt out from the euro and on the other hand ask to be involved in all the decisions of a euro that you not only do not want and but also often criticise."

"We are not going to apologise for what we are doing to save our currency," said the French president.

He added that demands by Cameron for a protocol exonerating the UK from certain laws on financial services in return for accepting a full treaty change involving all 27 member states were "unacceptable".

The new set-up fits in well with Paris' wish to have countries move forward without being unnecessarily constrained by recalcitrants or by EU institutions. The 26 have agreed to greater budgetary surveillance by Brussels, stronger fiscal discipline as well as to automatic sanctions for misbehaving states.

For his part, Cameron justified the situation on Friday morning by saying that the 26 "are having to make radical changes including giving up sovereignty."

"We had to pursue very doggedly what is in Britain's national interest. I wish colleagues well in the euro. While there were strong disagreements, it was good natured. What was on offer wasn't good enough for Britain."

The break represents a major symbolic shift for the European Union which has never before cemented a disagreement so publicly and so thoroughly, however.

"We would have preferred unanimous agreement," said European Commission President Jose Manuel Barroso, adding that as this was not possible "this was the only option left."

"This does not mean the EU institutions will not have a role," he added on the question of whether the new EU17+ will be allowed to use EU27-level institutions, making reference to legal advice from the commission's own department.

The new arrangement is likely to throw up a series of unpredictable political and legal problems which will emerge as the intergovernmental text is drafted in time for the EU leaders' Spring summit in March.

Leaders will reconvene later on Friday to discuss legal details surrounding their agreement.

The article was updated at 1.30pm local time Friday to reflect the latest status of the agreement