The European Commission has been asked to look into Britain's decision to drop a fraud inquiry into deals between UK arms firm BAE Systems and Saudi Arabia.
The Lib Dem call concerns EU competition rules
The Liberal Democrats said they wanted the EU to determine whether the move breached competition regulations.
The UK Serious Fraud Office (SFO) had been probing claims BAE paid bribes to secure a major arms deal in the 1980s.
The government halted the inquiry last year over national security concerns. BAE denied the corruption claims.
The government could face a potentially unlimited fine in the European Court of Justice if the Commission finds competition rules have been broken.
The call by the Liberal Democrats follows discussions between MEP Chris Davis and European Commission Internal Market Commissioner Charlie McCreevy.
Mr Davis had asked whether member states were allowed to sanction "even by way of non-action" the payment of bribes by companies within their territory.
He said: "Tony Blair has made Britain look cheap and shabby in the eyes of our European partners.
"By halting a major corruption inquiry he has turned us into a banana republic, robbing us of any moral authority to speak out about the need to raise standards of governance and business probity."
Liberal Democrat Treasury spokesman Vince Cable added the UK needed to show other EU member states that "we compete fairly".
"If it could be shown that the British government's inaction in this area and the dropping of the SFO investigation gave BAE an unfair advantage then this would constitute a serious breach of the law," he said.
Questioned on the issue in the House of Commons earlier this week, Solicitor General Mike O'Brien defended the decision to drop the case and accused Mr Cable of "headline grabbing".
He said the government's decision fully complied with "the rule of law".