LONDON (Reuters) - Prime Minister David Cameron's promise of a referendum on his country's membership of the European Union is a "huge distraction" that risks reducing Britain's influence in the bloc to that of Norway, Danny Alexander warned.
In an interview that highlights deep divisions within Britain's two-party coalition over Europe, Alexander, the number two at Britain's finance ministry and a member of the Liberal Democrat party, the junior coalition partner, said a British EU exit would be "catastrophic at every level".
Losing a say over how the world's largest single market is regulated would be particularly damaging, he warned.
"Look at the Norwegians for example, where in order to maintain access to the single market they basically receive the new rules on the fax machine from Brussels and they have to implement them without changing them," Alexander told Reuters.
Norway is not an EU member but has access to the bloc's single market in return for adopting most laws related to it.
"For a country that values its international influence and leadership and wants to maintain its trading position receiving a large chunk of our laws on the fax from Brussels rather than being able to shape them would be very bad for Britain," said Alexander.
Cameron promised in January to try to renegotiate Britain's membership of the EU and to hold an in/out referendum on the issue if he wins the next national election in 2015, a pledge that has sparked lively debate about Britain's role in the bloc.
His strategy has divided public opinion and the business community and caused tensions within the ruling coalition with the Lib Dems refusing to match his promise of a membership referendum, saying they would only hold such a vote if there was a further major change in British-EU relations.
But opinion polls show many Britons back Cameron on Europe. So do many MPs in his ruling Conservative party, as well as the predominantly eurosceptic press.
The surging anti-EU UK Independence Party, whose poll rating has gone from single digits to 19 percent in some polls, wants Cameron to go further and hold a referendum immediately in which it hopes people would vote to leave the 27-nation bloc.
"A HUGE DISTRACTION"
But Alexander said it was the wrong time for such a debate, arguing that change in the euro zone spurred by the currency bloc's debt crisis meant that Britain had a unique chance to reshape and lead the EU rather than leave it.
"It's not only irresponsible it is completely wrong to be saying actually of all times now is the time to be contemplating leaving Europe when we've got this wonderful opportunity to lead in Europe.
"Arguments about calling a referendum on British withdrawal, sort of apropos of nothing, are a huge distraction. Britain leaving the EU would be catastrophic at every level - for our economy, for our ability to attract investment, for trade, for jobs and for political influence."
Cameron has said he doesn't want Britain to exit the EU, a scenario dubbed "a Brexit", saying he wants it to remain inside a reformed EU where nation states have more say over their own affairs.
But critics warn that his attempts to renegotiate British-EU relations could undermine Britain's influence inside the bloc and risk triggering an unpredictable process that could see it abruptly pushed or forced to jump out of the EU.
The United States, Britain's closest ally on the world stage, has already said it would prefer Britain to stay in.
Alexander said Britain's own economic interests were simply too tied to those of the EU to consider a divorce and that it benefited too much from being perceived as both a gateway to Europe and a bridge across the Atlantic.
"We host more headquarters of non-EU firms than I think France and Germany and several other countries combined," he said. "We would put our attractiveness to that investment at risk at just the time we can't afford to do so."
(Editing by Alistair Lyon)