Backbenchers angrily questioned the point of joint government after the LibDem Deputy Prime Minister announced the price he would extract for the loss of his plans for reform of the House of Lords.
The party will no longer back Tory plans to change electoral boundaries – delivering a significant blow to Conservative hopes of forming a majority government at the next General Election.
Plans to reform every Westminster constituency in the UK had been forecast to give the Tories an extra 20 safe seats when voters next go to the polls, and are considered crucial to the party's chances.
In an unprecedented attack during a press conference in Westminster yesterday, the LibDem leader said he had no choice but to block the changes as he accused his Coalition colleagues of a "breach of contract".
The Conservatives were not "honouring their commitment" on Lords reform, he said, and, because of that, "part of our contract has now been broken".
He said he had told Prime Minister David Cameron that, when the MPs vote on the boundary plans, "I have told my party to oppose them".
However, Mr Clegg denied the row marked the beginning of the end for the Coalition, but admitted the administration was entering a "new moment".
The announcement that boundary changes are to be the price extracted for the loss of Lords reform means the plans are effectively dead.
Labour had already denounced the proposals as gerrymandering and, without LibDem support, the Tories cannot push the proposals through the Commons.
In a sign of a possible new phase for the Coalition, LibDem sources last night indicated they did not expect their ministers to lose their jobs for opposing the boundary changes.
Ministers who vote against Government policy usually face the sack under strict whipping policies.
Senior LibDems suggested the move was important for the party to show it could not be pushed around. "This is a big moment," one told The Herald.
Tory backbenchers reacted angrily to the announcement, accusing the Mr Clegg of "petulance".
Clacton MP Douglas Carswell tweeted: "Apart from keeping ministers in Government, what is the Coalition now for?"
And Tory MP for Portsmouth North Penny Mordaunt said she was delighted Lords reform was dead.
Mr Cameron had pledged to spend the summer attempting to convince his backbenchers of the merits of Lords reform, after a vote was pulled last month following threats of a historic rebellion against the plans. But the Prime Minister is understood to have informed Mr Clegg he had been unable to make progress.
Tory MPs insisted they had not broken their end of the bargain, pointing to the wording of the Coalition Agreement, signed in 2010, which committed them to bringing forward only proposals for such a change.
But LibDems, including Deputy Leader Simon Hughes, said the party was "very angry" about the issue.
The party has failed to bring forward a number of its policies within Coalition. It made a U-turn on a manifesto pledge to phase out tuition fees and lost a UK referendum on plans to introduce the Alternative Vote (AV) system to elect MPs.
The campaign created tensions between former LibDem Energy Secretary Chris Huhne and Chancellor George Osborne, who opposed the move to AV.
However, LibDems have claimed success on the increase in the personal tax threshold at the last Budget.
Senior Tory ministers last night insisted the Coalition could survive the setback.
Culture Secretary Jeremy Hunt described Mr Clegg's announcement as "disappointing" but said it would not affect the two parties' ability to work together in government.
Mr Clegg also bitterly criticised Labour leader Ed Miliband, who he said had failed to suggest a way through the impasse, despite professing to support Lords reform.
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