EU ministers meeting in Brussels have failed to reach an agreement on legislation that would give new employment rights to agency workers.
Britain and Germany opposed the directive
The new EU directive would give temporary workers, such as those employed through agencies, similar rights to permanent staff.
The legislation will be discussed again in 2008.
Britain opposed the proposals, arguing it would damage the country's flexible labour market and hit jobs.
But unions say it is unfair that agency staff get less pay and fewer holidays.
Ministers also failed to agree on conditions for an opt-out from a maximum 48-hour work week as part of the EU's working time directive.
Business Secretary John Hutton said the UK government had not been isolated in its opposition, with countries such as Germany and Malta also expressing concern.
"This is a litmus test of Europe's ability to balance the legitimate need for employment security, which we clearly accept, with the case for Europe to be as effective and competitive as it possibly can," Mr Hutton said.
Britain has seen a huge increase in recent years of the use of temporary workers by employers.
Supporters believe it has made the economy more flexible, and the Confederation of British Industry (CBI) has warned any changes to agency workers' rights could cost a quarter of a million UK jobs.
Tom Hadley, from the Recruitment and Employment Confederation, which represents recruitment agencies, told the BBC the new rights would put employers off using temporary staff.
"There is a real threat that the bureaucracy and uncertainty that the directive would bring about would make employers think twice about using agency workers and that, in our view, isn't good for companies, and it's certainly not good for individual workers either."
Minimum wage experience
But the Trades Union Congress (TUC) says it is unfair that agency workers lack the same rights as permanent employees.
It wants the government to accept the new agency workers directive, which would stop temporary employees receiving less pay, training and pensions and fewer holidays than full-time staff.
Sarah Veale, the TUC's head of equality and employment, said the example of the national minimum wage showed that increasing workers' rights did not necessarily mean job losses.
"The employers' organisation, the CBI, said when the national minimum wage was about to be introduced that it would result in huge loss of jobs and, of course, it didn't.
"In fact if anything employment levels went up after that, so I don't think the TUC buys the argument that having protection and basic, decent terms and conditions of work for agency workers would mean that we'd lose that flexibility or lose jobs in the UK labour market. "