Business Secretary Lord Mandelson has maintained that protectionism would be a "huge mistake" as talks started in a bid to end a bitter dispute over the use of foreign workers on construction projects.
He said that adopting protectionism - the policy of protecting domestic industries against foreign competition - could turn recession into depression.
But Lord Mandelson's comments were given a cool reception from union leaders who continued to argue that British workers were being discriminated against.
Officials from Government departments, unions, employers and the mediation service Acas spent much of the day in discussion following a series of wildcat strikes that erupted across the country on Friday.
The protests were prompted by a decision to bring in hundreds of Italian and Portuguese contractors to work on a new £200 million plant at the giant Lindsey Oil Refinery at North Killingholme, North Lincolnshire.
Allowing EU nationals to find work in the UK is protected under European Union legislation and Mr Mandelson said it would be wrong to try to overturn the law as it stands.
He said: "I understand people's concerns about jobs and it is important to make sure that both domestic UK law and European rules are being applied properly and fairly. But it would be a huge mistake to retreat from a policy where within the rules, UK companies can operate in Europe and European companies can operate here.
"Protectionism would be a sure-fire way of turning recession into depression."
But Paul Kenny, general secretary of the GMB union said: "No company should be able to discriminate against anyone on the grounds of where they were born. You simply cannot say that only Italians can apply for jobs as has happened in this case. No one is saying that different countries cannot bid for different contracts. What is happening here would be illegal under UK domestic law and it is about time Lord Mandelson realised that. He is talking about the wrong problem - he should start focusing on the right one.
Acas was drafted in on Friday night by Employment Minister Pat McFadden to mediate between the opposing parties, but some MPs have warned there is little that can be done to resolve the dispute while the UK remains a member of the European Union.
