German Chancellor Angela Merkel is reported to have made clear she will withdraw her support for Britain's continued EU membership if David Cameron insists on pushing through curbs on immigration.
News weekly Der Spiegel quoted government sources as saying Ms Merkel fears the UK is approaching "the point of no return" and is becoming worried for the first time that a British exit is a real possibility.
In response to the report, Downing Street said Mr Cameron remained determined to address the issue of immigration in renegotiating Britain's EU membership.
Chancellor George Osborne also said the Conservatives would "make sure Britain gets a fair deal".
Ms Merkel is reported to have told the PM on the sidelines of an EU summit last month that his efforts to limit immigration undermined core principles of bloc.
"Should Cameron persist (in this plan), Chancellor Angela Merkel would abandon her efforts to keep Britain in the EU," the sources were quoted as telling the magazine.
"With that a point of no return would be reached," they said, adding: "That would be it then."
There was no suggestion in the Der Spiegel report that Germany would itself push Britain towards the exit.
Ms Merkel has said she strongly backs continued British membership, but not at any price.
No member state has ever left the 28-nation bloc, although there is a legal mechanism for a country to do so if it chooses. Other member states cannot force a country out.
The Prime Minister wants to renegotiate the terms of Britain's membership ahead of the Conservatives' promised referendum by the end of 2017.
He is under pressure to tighten the UK's immigration controls to counter the growing popularity of UKIP.
Mr Cameron will be aware of the need to calm Tory jitters ahead of this month's crunch by-election in Rochester and Strood, where the party is desperate to prevent a second seat falling to UKIP.
The Sunday Times reported he was drawing up plans to ban migrants who do not have a jobs and deport those who are unable to support themselves after three months in the country.
A German government spokesman said the general principle of freedom of movement in the EU is not negotiable, but added there is a strong interest in the two countries discussing how to tackle abuse of that freedom.
Downing Street described the report of Ms Merkel's warning as "speculation", but said Mr Cameron would press ahead with renegotiating changes to EU immigration.
"The Prime Minister's view on this hasn't changed," a Number 10 spokeswoman said.
"He was clear before the European Council that he recognises the British public have got concerns about the impact of EU migration here in the UK, and he is going to address these as part of the renegotiation."
Reacting to the reported remarks, Mr Osborne said: "We will fight for Britain's interest, we will make sure that Britain gets a fair deal in Europe and then make sure the British people have the final say in a referendum."
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