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LONDON (Reuters) - Britain's veto of European Union treaty changes drew an embarrassed silence from London's financial heartland, where bankers fear last week's hardline stance will lead to a further loss of influence for the City.
Prime Minister David Cameron said he had vetoed the changes to allow countries that share the euro to pursue closer fiscal union because his EU partners would not give Britain enough freedom over how it regulates the City of London.
But people working in London's financial industry denied Cameron's actions had been inspired by them and said they could ultimately damage the capital's position as a financial centre.
"This leaves us considerably worse off than we were before," said one City insider.
"There is a very strong body of opinion, not all over Europe, but in many financial regulators, that Anglo-Saxon financial services have caused the crisis and therefore anything bad for us is good for them," this person said.
Before the financial crisis of 2008 the UK was able to take a more laid-back approach on European financial matters and still see its input applauded and taken on board. Since then City lobbyists have been working in partnership with other EU countries to get its views to the negotiating table.
After failing to secure a series of guarantees for the UK's financial industry, Cameron on Friday vetoed an EU treaty to rescue the single currency, causing Britain to cast itself adrift from its continental partners.
"Having royally annoyed 26 members states I don't see how it's made things any easier," said the City insider.
The 26 other EU members will hammer out a deal between themselves to forge closer economic ties and find a way out of the continent's debt crisis, which has boosted funding costs for countries such as Italy to unsustainable levels.
Banks feared other EU countries would now start drawing up regulation without paying much heed to the City of London -- home to Europe's largest financial sector -- with the risk that this would fragment the continent's single market.
The UK is host to more branches of foreign banks than any other country worldwide, a third of those from the euro area. Around half of European investment banking activity is conducted in the UK, according to the CityUK lobby group.
But two people inside large European banks with a presence in London said they expected little immediate impact.
"Deutsche would never leave London, as this is the banking centre of Europe," a senior investment banker said. "London has many advantages - less strict job laws, less taxes etc - therefore there will be no repositioning of Deutsche."
Deutsche Bank, BNP Paribas and Societe Generale, the European banks with the largest London investment banking presence, declined to comment.
The UK is strongly opposed to a tax on financial transactions -- sometimes called a Robin Hood tax, or a Tobin tax after the U.S. economist who came up with a similar idea in the 1970s -- that the EU wants to impose.
But Cameron had already said that Britain would veto the plan, which would dampen trading volumes to the detriment of London's trading firms and investment banks.
"I'm not sure anybody from the City instructed him and said: "you must go to (Brussels) and defend this, this and this," one senior financial figure said, asking not to be named.
"There is an ongoing discussion with the government from the City on a whole series of issues ... but to be totally frank, a month ago it looked as if the government was encouraging (these measures)," this person said.
The UK also wants to make sure that the European Banking Authority (EBA), which coordinates national banking watchdogs across Europe, stays domiciled in London.
And it plans to sue the European Central Bank (ECB) over a new rule that will force clearing houses to be located in the euro zone, if they handle large amounts of euro-denominated securities.
But rescuing the single currency and ensuring the integrity of the single European market for financial services was far more important than such bickering, the London-based Association for Financial Markets in Europe (AFME) said.
In some cases, the UK wants stricter rules than the EU. It is, for instance, planning tougher capital demands on its banks, and will have to persuade EU decision makers to allow it to do this in a new EU bank capital law.
Still, there was a widespread expectation that Britain might return to the negotiating table with its EU peers in the coming months, given how important it was for economies on both sides of the Channel not to let the euro collapse.
"There is an enormous, and predictable amount of political show-boating going on from both sides in the UK and from the principal players in Europe," said David Lloyd, head of institutional portfolio management at M&G.
One person at a large U.S. investment bank called the fracas "Act 1, Scene 1," and said it was too early to say whether London would lose relevance. But the bank already had a large presence in other major European centres just in case it did, they added.
"I would be surprised if it (the veto) had that kind of significant influence," said Rupert Watson, head of asset allocation at banking and insurance group Skandia.
"The world is becoming a freer place in which to trade ... and it is likely to remain the case that Britain and the rest of Europe will continue to do business in this way," he said.
Some said that Cameron's actions seemed directed at placating right-wing members of his Conservative party, although there were some vocal supporters for Cameron in the City too.
"There are stumbling blocks to (the) protection (of the City) from this point onwards, but equally, there would have been even more stumbling blocks had (Cameron) gone along with the treaty changes and got nothing in return," said Terry Smith, chief executive of interdealer broker Tullett Prebon.
Additional reporting by Sinead Cruise, Sudip Kar-Gupta and Sarah White in London and Philipp Halstrick in Frankfurt, Editing by Alexander Smith and Elaine Hardcastle