Eurosceptics in referendum call after £96 billion Greek bail-out

Eurosceptic Tories demanded a referendum on Britain's relationship with the EU today after a £96 billion bail-out deal for Greece brought full economic union closer.

Stock markets across the world rallied after eurozone leaders thrashed out an agreement to save the stricken currency and stop Athens going bankrupt.

But it left David Cameron and George Osborne facing a battle with their own backbenchers over moves towards a European "Treasury" with full taxation and spending powers.

After the deal was secured, French president Nicolas Sarkozy said proposals for "economic government" on the Continent would be unveiled before the autumn.

"Our ambition is to seize the Greek crisis to make a quantum leap in eurozone government," he stated.

Mr Osborne yesterday signalled a major shift in policy by saying Britain should be prepared to let eurozone countries forge closer economic ties, leaving Britain in the slow lane of a two-speed Europe.

Conservative backbenchers said such a move would mark a "massive historic change" and insisted the British people be given a say.

Bill Cash, chairman of Parliament's European scrutiny committee, said closer union was "effectively creating an aircraft carrier to which we are tied with a rope and that of course will not be in our interest".

He went on: "This fundamentally affects the UK and our relationship with Europe and therefore a referendum is essential because this is a massive historic change."

Former Cabinet minister John Redwood said Britain should demand extra powers from the Continent - such as fewer laws and greater say in decision making - if the eurozone moved to full fiscal ties.

Backing calls for a referendum, he added: "I would like the Government to renegotiate a looser arrangement and then put it to the British people."

The demands put backbenchers on a collision course with the Prime Minister and Chancellor. Downing Street sources said there was "virtually no potential for a referendum" because UK sovereignty will not be affected.

Mr Osborne hailed last night's deal as an "important and positive development", insisting the UK would not pay towards it.

It will allow Greece to pay off its massive debts at lower interest rates and over longer terms, with softer repayment terms also extended to Portugal and Ireland as part of moves to shore up the euro and stop the crisis spreading to Spain and Italy.