Chancellor George Osborne has insisted the UK will pursue its “national interest” in Europe despite German warnings about its future in the EU.
Mr Osborne said the British people wanted concerns about EU immigration and access to benefits addressed.
The German government has insisted the right of EU nationals to live and work in other member states is sacrosanct.
Angela Merkel has reportedly said she would rather see the UK leave the EU than allow a quota system for migrants.
The BBC’s Europe Editor Gavin Hewitt said the German chancellor wanted the UK to stay in.
But he said an article in Der Spiegel news magazine, which quoted German government sources as saying she feared the UK was near a “point of no return”, signalled Berlin’s view that British calls for curbs on the free movement of people was a “red line” that could not be crossed.
David Cameron wants to renegotiate the terms of the UK’s continued membership before holding an in-out referendum, if he remains in power after next year’s general election.
The prime minister, who is expected to set out his next steps on immigration before Christmas, has insisted freedom of movement of workers would be “at the very heart” of his renegotiation strategy.