German Chancellor Angela Merkel would rather see the UK leave the European Union than end the right to free movement of labour within the EU, it has been claimed.
Merkel reportedly warned David Cameron that he is approaching a "point of no return" if he continues to push for migration reform that requires fundamental changes to EU principles.
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The German news magazine says it is the first time Merkel has acknowledged that the UK’s exit from the EU was possible.
Cameron wants to renegotiate the terms of the UK’s EU membership before holding an in-out referendum. He has said that the freedom of movement of workers would be at the "very heart" of his renegotiation strategy.
But a German government source said: "Should Cameron persist, Chancellor Angela Merkel would abandon her efforts to keep Britain in the EU. With that, a point of no return would be reached. That would be it then."
Two Cabinet ministers told The Sunday Times that new proposals would have to be drawn up that maximise curbs within the existing rules.
"The focus is on drawing up a German-compliant package of measures," said one. "Cameron needs to square Merkel or we won’t get anything. We’ve got to stretch the existing rules to their limits."
This might include banning EU migrants unless they have a job and deporting them if they cannot support themselves after three months.
Another minister suggested that the focus would be on the original understanding of freedom of movement to work.
"The assumption was that you moved around for work, not to come on the chance that you could find a job. We're looking at whether you can restrict new arrivals to those with jobs," they said.
A Downing Street spokesman said Cameron would make a speech on immigration before Christmas and stressed "You can be sure he will always put Britain first".
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