Europe is divided in a rift over building a fiscal union to preserve its single currency, the euro.
After 10 hours of talks, a large majority of countries led by Germany and France agreed early on Friday to move ahead with a separate treaty, leaving Britain isolated.
Twenty-three of the 27 leaders agreed to pursue tighter integration with stricter budget rules for the single currency area.
But Britain said it could not accept proposed amendments to the European Union treaty after failing to secure concessions that France and Germany were not willing to give.
France and Germany are pushing for tough new budgetary rules to be enshrined in the accord. But British Prime Minister David Cameron said an EU-wide deal is not in Britain's interests.
All 17 members of the euro zone and six countries that aspire to join resolved to negotiate a new agreement alongside the EU treaty. It will have a tougher deficit and debt regime to insulate the euro zone against the debt crisis.
The leaders agreed on automatic sanctions for euro area deficit offenders unless three-quarters of states vote against the move, and approved a new fiscal rule on balanced budgets to be written into national constitutions, Reuters reports.
They decided that the currency bloc's future permanent bailout fund, the ESM, would be capped at €500 billion, as Germany had insisted.
It will also not get a banking licence, which would have allowed it to draw on European Central Bank funds to increase its firepower - another move Germany objected to.
As soon as the draft summit agreement leaked late on Thursday, a senior German official rejected key measures including letting the future rescue fund - the European Stability Mechanism - operate as a bank, and a long-term goal of issuing common euro zone bonds.
The leaders agreed to explore the idea of providing bilateral loans to the International Monetary Fund totalling €200 billion euros, with €150 billion coming from the euro zone to bolster IMF resources to tackle Europe's debt crisis.
European Council president Herman Van Rompuy, the summit chairman, wanted all the EU states to agree to the rule changes via a minor adjustment to a treaty protocol that could be implemented quickly without requiring full ratification.
But German Chancellor Angela Merkel demanded a fully fledged treaty change to give the measures extra weight.
Ms Merkel and French President Nicolas Sarkozy had said that if all the EU states did not support more fiscal union by adapting the existing Lisbon treaty, then the 17 euro zone countries should press on alone with more integration.
The danger for Britain's David Cameron is that if a large majority of EU countries do push ahead with deeper integration, it could involve discussions over changes to the single market and financial regulation - both of which could have a profound impact on the British economy.
As the leaders were speaking in Brussels, the European Central Bank cut its interest rates back to their historic low of 1%. The 0.25% cut was widely expected by financial markets and was the second drop in the official interest rate in five weeks.