EU-wide treaty change bid fails
Most EU members have agreed to press ahead with a tax and budget pact to tackle the eurozone debt crisis.
But a German and French attempt to get all 27 EU states to back changes to the union's treaties was dropped after objections from the UK.
Prime Minister David Cameron had insisted on an exemption for the UK from some financial regulations.
Instead, 23 states, including eurozone members, will adopt an accord with penalties for breaking deficit rules.
"We wish them [eurozone states] well because we want everyone to sort out their problems because we all need that [economic] growth," Mr Cameron said.
"But at the end of the day I made my judgment that it was not in Britain's interests [to take part]. I effectively wielded the veto."
The new tougher rules on spending and budgets will now be backed not by an EU treaty but by a treaty between governments. It will be quicker to set up but it may prove less rigorous, says the BBC's Europe editor Gavin Hewitt in Brussels.
But, he says, Europe has taken a big step towards closer integration, with binding rules over tax and spending, and sanctions against countries that overspend.
Discussions on the details of the new fiscal arrangement are due to resume shortly. EU leaders aim to have the pact ready by March.
Among the measures agreed on, leaders pledged to provide more money for the International Monetary Fund (IMF) to fund bailouts.
The deal though failed to lift the markets, which are still hoping for more intervention by the European Central Bank (ECB), and European stocks opened slightly down on Friday.
German praise
Nearly 10 hours of talks could not produce an agreement involving all member states. Instead, the 17 members of the eurozone will work on a separate deal outside EU treaties. They will be joined by at least six and possibly eight other countries.
The UK and Hungary will play no part in a new inter-governmental agreement, while Sweden and the Czech Republic will consult their parliaments before making a decision.
Mr Sarkozy said the sticking point had been Mr Cameron's insistence on a protocol allowing London to opt-out on proposed change on financial services.
"We could not accept this," he said.
UK Foreign Secretary William Hague, though, said Mr Cameron had been "very sensible", accusing EU countries of not doing enough to meet Britain's concerns.
"What they've [EU leaders] committed themselves to here is to giving up more national control over their budgets, and us standing apart from that is not being isolated from them, it is a very sensible thing to stand apart from that," he told the BBC.
During the talks, eurozone leaders agreed to work on tough new budgetary rules, which envisage automatic penalties.
The main measures agreed to as part of the new agreement, called a "fiscal compact" include:
a cap of 0.5% of GDP on countries' annual structural deficits
"automatic consequences" for countries whose public deficit exceeds 3% of GDP
the tighter rules to be enshrined in countries' constitutions
European Stability Mechanism (ESM) to be accelerated and brought into force in July 2012
adequacy of 500bn-euro (£427bn; $666bn) limit for ESM to be reassessed
Eurozone and other EU countries to provide up to 200bn euros to the IMF to help debt-stricken eurozone members
The German Chancellor, Angela Merkel, praised the plan of action, saying it would contribute to securing the euro.
"I believe that after long negotiations this is a very, very important result because we have learned from the past and from mistakes and because in future [there will be] binding decisions, binding rules, more influence from the commission, more community and with that higher coherence."
ECB chief Mario Draghi said the accord would lead to much more discipline in economic policy, calling it "a very good outcome for the euro area".
EU-wide treaty change bid fails
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