Chancellor George Osborne has insisted the UK will pursue its 'national interest' in Europe despite German warnings about its future in the EU.
Mr Osborne said the British people wanted concerns about EU immigration and access to benefits addressed.
German Chancellor Angela Merkel has reportedly said she would rather see the UK leave the EU than allow the UK to have a quota system for EU migrants.
The BBC's Europe Editor Gavin Hewitt said Germany wanted the UK to stay in.
However he said an article in Der Spiegel news magazine, which quoted German government sources as saying Mrs Merkel feared the UK was near a 'point of no return', signalled Berlin's view that British calls for curbs on the free movement of people was a 'red line' that could not be crossed.
David Cameron wants to renegotiate the terms of the UK's continued membership before holding an in-out referendum, if he remains in power after next year's general election.
The prime minister, who is expected to set out his position on immigration before Christmas, has insisted freedom of movement of workers would be 'at the very heart of my renegotiation strategy for Europe'.
But Mrs Merkel is said by the magazine to have made clear she will withdraw her support for the UK's continued EU membership if he continues to push for migration reform which requires fundamental changes to the principles of the organisation.
The German chancellor's apparent warning to Mr Cameron is reported to have come in a meeting on the fringes of the latest EU summit in Brussels last week.
According to the Sunday Times, Germany has already rejected a proposal to impose quotas on low-skilled EU migrants by limiting the national insurance numbers issued to them.
Der Spiegel, quoting sources within the German chancellor's office and German foreign ministry, said this was the first time Mrs Merkel had acknowledged that the UK's exit from the EU was possible.
'Should Cameron persist (in this quota plan), Chancellor Angela Merkel would abandon her efforts to keep Britain in the EU,' it quoted the sources as saying.
'With that a point of no return would be reached. That would be it then.'
'UK disquiet'
Der Spiegel reported that Mr Cameron was now looking at a plan to stretch the EU rules 'to their limits' in order to ban migrants who do not have a job, and to deport those who are unable to support themselves after three months.
Speaking at last month's EU summit, Mrs Merkel said she would look at UK plans to stop unjustified benefit claims but would not 'meddle' with basic freedom of movement rules.
Mr Osborne said a Conservative government would always 'do what is in the interest of our country and our economy' but the UK would approach future negotiations in a 'calm and rational' way.
'What we have today is a story based on speculation about what Angela Merkel might have said about something David Cameron might say in the future,' he told BBC Breakfast.
'The Germans understand the disquiet caused among the British people when you have people coming from other parts of Europe to claim our benefits who do not necessarily have jobs to go to.
'This is causing huge pressure on public services. The British public want that addressed.'
The BBC's Gavin Hewitt said Mrs Merkel's spokesman was urging people 'not to attach too much importance' to the article but said that it did show the 'real frustration within the German political establishment' about the UK's stance on immigration.
Conservative MP David Davis said Mrs Merkel was an 'important' figure in Europe but 'she is not an iron lady', suggesting she was also likely to come under pressure from within Germany to restrict immigration within Europe from countries with lower average incomes.
UKIP leader Nigel Farage said he took the German warning seriously, saying that their 'politicians do not bluff' and it was not possible to have an 'a la carte menu' in Europe.
'David Cameron will fiddle around the edges and end up satisfying nobody,' he told the BBC.
The BBC's political editor Nick Robinson said the Der Spiegel article should be seen as part of Germany's 'negotiating strategy' ahead of future discussions among all 28 member states, which are unlikely to conclude until 2016 at the earliest.
The UK's dilemma, he said, was that a dynamic, growing British economy was always likely to result in a certain level of immigration from EU, particularly if the UK did not insist on migrants having to make tax contributions before getting child benefits and tax credits.
Deputy Prime Minister and leader of the pro-European Liberal Democrats, Nick Clegg, said the Conservatives were 'in a flap' about the issue ahead of the Rochester and Strood by-election on 20 November, where they are being challenged by UKIP.
'The fact is that the Conservative Party are now in such panic about UKIP that they are actually prepared to jeopardise Britain's place as a leading nation in Europe,' he told BBC Radio Oxford.
Posted by Unknown on Monday, November 3, 2014 - Rating: 4.5
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