Nick Clegg, the deputy prime minister and leader of the Liberal Democrat party, accused Cameron's Conservatives of floating reform ideas that risked sparking tit-for-tat retaliation from other EU member states who could make life difficult for the around 2 million Britons living abroad.
Clegg was responding to a government report leaked to the media which suggested the Conservatives want to cap the number of EU immigrants at 75,000 a year, stop high-skilled EU migrants from moving without a firm job offer, and stop low-skilled ones relocating unless they are on a special list.
Other ideas included barring EU migrants from access to welfare benefits for their first five years, reserving jobs for Britons, and limiting all labour movement from poorer EU member states until they become richer.
Clegg's comments underlined how Cameron's idea of trying to recast Britain's membership of the EU is straining his relationship with a party he may have to govern with again after an election in 2015.
Clegg told a news conference the policy ideas outlined in the document were "illegal and undeliverable".
"If we pull up the drawbridge now and said to German lawyers or Finnish engineers or Dutch accountants they can't come to work it would be a disaster for our economy," he said.
"We are an open economy. The City of London would grind to a halt overnight. It would be very very bad for British business and for the health of the British economy."
‘Legitimate’ reform area
Government sources said the ideas were part of Cameron's preparations to try to renegotiate Britain's EU ties after 2015 if he wins an election that year. He has then promised to give Britons an in/out EU membership referendum.
Theresa May, Britain's interior minister, told lawmakers on Monday it was "legitimate" to look at restricting freedom of workers' movement within the EU and that the issue should be part of any renegotiation.
Separately, Cameron unveiled immediate plans to limit EU migrants' access to welfare in Britain last month, stirring a row with the European Commission.
Cameron's Conservatives risk seeing their vote split at European elections next year and at the 2015 national election by the anti-immigration UK Independence Party (UKIP) and he is under pressure from his own party to get tough on the issue.
Trailing in opinion polls, Cameron is also trying to allay public fears about a possible influx of Romanians and Bulgarians next year when EU restrictions on those two countries expire, something UKIP says could lead to millions of new migrants.
Clegg, who is strongly pro-European, said people were "right" to be worried, saying he agreed with Cameron when it came to making it more difficult for EU migrants to claim welfare benefits.
The European Commission's criticism of government proposals on the subject was "spectacularly wrong," he said.
"You cannot protect the core freedom which is at stake here, which is the freedom to move to one EU member states from another to look for work, if you don't at the same time satisfy the public that is not the same as the right to claim benefits," said Clegg.