In a political gamble aimed at shoring up Cameron's leadership, the bill would pave the way for an in-out vote by the end of 2017 that will decide Britain's geopolitical and economic destiny for decades ahead.
However, the Conservatives are part of a two-party coalition and do not have a parliamentary majority, so the bill's chances of success aren't guaranteed. Rebels from other parties would need to support it too for it to become law.
Cameron's highly unusual decision to sanction the draft bill was announced in the United States on Monday evening and comes less than four months after he pledged to renegotiate the terms of Britain's EU membership and then hold an in-out vote before the end of 2017.
Referendum promise
Many Conservatives say they want to be part of the EU's single market but want to ditch many other aspects of a relationship they fear is becoming increasingly anti-democratic and bureaucratic.
Cameron's referendum promise in January failed to satisfy Conservative critics who have been pressing him to bring forward the vote to before the next national election in 2015 or to pass a law committing the party to holding a vote by the end of 2017.
He decided to partially accede to their demands to try to end a public debate that has made his party look divided, threatening his own re-election chances.
"The Conservative Party will publish a draft bill to legislate for an in-out referendum by the end of 2017," a senior Conservative source told reporters in Washington after Cameron met US President Barack Obama On Monday.
"We will examine all opportunities to bring the bill before parliament, including a private member's bill," the source said.
Conservatives believe the demarche should draw a line under weeks of internal bickering that has damaged the party's image while piling pressure on the opposition Labour party to explain why it doesn't favour such a referendum.
It will be hard for the Conservatives to push any referendum bill through parliament because it will almost certainly be opposed by their pro-EU coalition partners, the Liberal Democrats, as well as by Labour.
Despite the move up to 100 eurosceptic Conservative members of parliament are still expected to back an amendment this week criticising legislative plans unveiled by the government because they did not include such a bill.
Conservative lawmaker John Baron, one of the two figures behind the amendment, said Cameron's promise of a draft bill would not persuade him to back down.
"I am sticking by what I am saying. They know that this option could very well fail," he told Reuters. "A far better approach would be to have the courage to support our amendment on Wednesday."
Europe squabble
Cameron came to power in a coalition government three years ago after telling his party in 2006 to "stop banging on about Europe", an issue that has divided the Conservatives for decades and helped bring down two of his predecessors, Margaret Thatcher and John Major.
But Conservatives in parliament have been rattled by the growing popularity of the UK Independence Party (UKIP), which campaigns for Britain's withdrawal from the EU and tighter immigration laws. A Guardian/ICM poll showed on Tuesday that UKIP's support had surged to a record high of 18 percent.
UKIP's poll rating has climbed steadily since Cameron's EU referendum pledge in January, with the party taking a quarter of the vote in local elections earlier this month.
Labour, which has a 10-point lead over the Conservatives, said Cameron had "lost control of the agenda and lost control of his party" at a time when he should be working on reviving Britain's economy.
"This seems to be just the latest panicked response from the prime minister who is now following, rather than leading his backbenchers," Labour foreign affairs spokesman Douglas Alexander said in a statement.
