A deep and seemingly irreconcilable rift between the Liberal Democrats and Conservative coalition partners has been revealed after the deputy prime minister, Nick Clegg, publicly admitted he was "bitterly disappointed" by the outcome of last week's European summit, where David Cameron wielded Britain's veto.

Warning that Britain could be left "isolated and marginalised" in the wake of the summit, Clegg exposed the depths of his unhappiness with Cameron's stance, saying "things would have been different" if he had been negotiating in Brussels.

Challenged that the outcome could mean Britain ending up outside the EU, Clegg said: "I will fight that tooth and nail. A Britain that leaves the EU will be considered irrelevant by Washington and will be a pygmy in the world when I want us to stand tall in the world."

Clegg joined a chorus of condemnation from other senior Lib Dems, with Lord Ashdown describing the use of the veto as a "catastrophically bad move", while the business secretary, Vince Cable, said Britain had "finished in a bad place" at the EU summit.

But William Hague, the Tory foreign secretary, insisted Britain was "not marginalised" and suggested Clegg had signed up to the government's bargaining position in advance of the summit.

"Our agreement is required in the EU to a whole range of other decisions that will be coming up over the next few months. We work closely with our partners on foreign policy, on the single market, and so on, and that will continue."

He added that "everybody knows" that the Tories and Lib Dems took different approaches to Europe but worked through all issues to "a common position".

"The negotiating position that David Cameron took on Thursday night and Friday morning was agreed in advance with the Lib Dems in the coalition," he told Sky News.

However, Clegg told BBC1's Andrew Marr show: "I'm bitterly disappointed by the outcome of last week's summit, precisely because I think now there is a danger that the UK will be isolated and marginalised within the European Union. I don't think that's good for jobs, in the City or elsewhere, I don't think it's good for growth or for families up and down the country."

He said he would now be doing "everything I can to ensure this setback does not become a permanent divide".

Clegg spoke by telephone to the prime minister at 4am on Friday as talks ended in Brussels. The Lib Dem leader said: "I said this was bad for Britain. I made it clear that it was untenable for me to welcome it."

He said Tories welcoming the outcome of the summit were "spectacularly misguided". At prime minister's questions last Wednesday, Conservative backbenchers urged Cameron to show "bulldog spirit" in Brussels.

But Clegg said on Sunday: "There's nothing bulldog about Britain hovering somewhere in the mid-Atlantic, not standing tall in Europe, not being taken seriously in Washington." He warned the UK was "retreating further to the margins" of Europe.

Clegg dismissed calls for a referendum on Britain's relationship with Europe, saying: "Far from retreating further to the margins, which is what some Eurosceptics want, we should be re-engaging fully and we are going to have to redouble our efforts in doing so."

He added: "There is no case for a referendum when there is no transfer of sovereignty of power.

"This is the irony: we were never being asked as a country to transfer any sovereignty whatsoever from the United Kingdom to the European Union.

"What we were being asked to do was consent to a new set of arrangements which would allow the eurozone to do something fiscally. What David Cameron clearly needed was to bring something back to show that safeguards were secure, and that didn't happen."

Clegg said if he had been at the summit then "of course things would have been different".

"I'm not under the same constraints from my parliamentary party that clearly David Cameron is," he said.

But he dismissed talk of the coalition breaking up. "It would be even more damaging for us as a country if the coalition government was to fall apart," he said. "That would cause economic disaster for the country at a time of great economic uncertainty."

Ashdown said: "We have used the veto, we have stopped nothing. In the name of protecting the City we have made it more vulnerable."

The peer insisted the row would not topple the coalition, saying: "The coalition is in the interests of the country. That comes first."

Cable also expressed concern that Britain had "finished in a bad place" at the EU summit. He told The Sunday Telegraph: "I am not criticising the prime minister personally. Our policy was a collective decision by the coalition. We finished in a bad place."

Lib Dem backbencher and former Treasury spokesman Lord Oakeshott, who is seen as close to Cable, said the business secretary had spoken out against the government's negotiating position in the Cabinet last week.

"This is not a united coalition position," Oakeshott told BBC1's The Politics Show. "Vince Cable gave a very serious warning last Monday in the Cabinet against elevating these financial regulation points into a make or break deal. He warned on that. He didn't get any support but that warning is there."

Asked whether Cable was considering resigning, he said: "I have no idea what Vince is going to do."

The shadow foreign secretary, Douglas Alexander, accused Cameron – who will on Monday face MPs as he makes a Commons statement on the summit – of "following the Conservative party, not leading the Conservative party".

Alexander told the Andrew Marr Show: "David Cameron didn't want a deal. He was keener instead to exploit the situation because of the position of his party. The roots of what happened on Thursday lie deep in David Cameron's failure to modernise the Tory party. He simply couldn't get a deal through the Commons."