The government's stance on eurozone banking union risks "complicity in the violation by the EU of its own laws", Conservative MP and chairman of the European scrutiny committee Bill Cash has alleged.
As MPs considered documents relating to EU banking union and monetary and economic union on 6 November 2012, Mr Cash urged MPs to back his amendment calling for a shift in government policy.
Ministers had tabled a Commons motion welcoming "the government's decision to remain outside the new supervisory arrangements while protecting the single market in financial services".
But Mr Cash said this did not go far enough, urging the government to veto any changes to the way in which decisions over financial regulation are taken in the EU that could harm the British national interest.
Currently, decisions on financial regulation are taken on the basis of majority voting, so no country has a veto but nations need to form alliances to get proposals through.
But proposals from the European Commission would mean the 17 single-currency states would need to form a common position, and would therefore have a powerful bloc vote.
Such a change would be illegal without an EU treaty change, Mr Cash's amendment said, calling on ministers to "to use its best endeavours to ensure that the proposed changes in the voting rights in the European Banking Authority are not adopted".
The Commission's "real intention", he continued, was "to cause so much harm to the UK and to the City of London".
"This is a recipe for economic disaster," the MP concluded.
Treasury Minister Greg Clark insisted that the government would not accept the proposals in their current form.
"We need to be vigilant to ensure that our access to the single market in banking, now and in the future, is not undermined and jeopardised by the creation of a banking union," he told MPs.
"That means putting in place safeguards to ensure that the UK cannot be discriminated against in the future in the single market decision-making processes."
Mr Clark argued that Mr Cash's amendment was unnecessary, telling MPs: "We will insist that they are changed and we will require full protection of the UK and other non-euro members' position within the EBA [European Banking Authority]."
At the end of the debate, MPs voted against the amendment by 273 to 33, a government majority of 240.
EU leaders have proposed the creation of a eurozone banking supervisor, the Single Supervisory Mechanism (SSM), which is expected to be in place by January 2013.
The European Central Bank would also be given oversight of banks and credit institutions established in the eurozone and would have powers to intervene in the running of those institutions.
But finalised proposals on how these new arrangements would work are not expected until December 2012.