Attempts to get all 27 EU states to agree changes to the bloc’s treaties to tackle the eurozone crisis have failed.
Speaking after long talks in Brussels, French President Nicolas Sarkozy said the 17 eurozone states and others would work on a separate pact instead.
France and Germany are pushing for tough new budgetary rules to be enshrined in the accord.
But UK Prime Minister David Cameron said an EU-wide deal “isn’t in Britain’s interests”.
After nearly 10 hours of talks between EU leaders, Mr Sarkozy said he would have preferred a new treaty involving all 27 member states.
But he said Mr Cameron had proposed a protocol to be written in the deal allowing London to opt-out on proposed change on financial services.
“We could not accept this,” Mr Sarkozy said.
Mr Sarkozy added that Hungary also decided to remain outside the proposed treaty, while the Czech Republic and Sweden wanted first to consult with their parliaments.
“All the others have wished to join the inter-governmental treaty,” the French leader said.
He denied suggestions that the new treaty would lead to a two-speed EU.
Speaking at a news conference shortly afterwards, Mr Cameron said he had made “a tough decision, but the right one”.
“What’s on offer isn’t in Britain’s interests,” he said, adding that he would not put the proposed deal before British parliament as it was an accord outside EU structures.