Updated at 11.50pm
If the UK wanted to remain part of the single market, it would also have to accept the free movement of people, the leaders of the EU 28 agreed during a working dinner tonight.
Addressing the media, Prime Minister Joseph Muscat said this meant that one of the bones of contention of the referendum would have been defeated.
Dr Muscat said that there was agreement across the board that any time type of relationship with the European Union would have to be inferior to membership.
The dinner also agreed that the decision about who should take over the UK's presidency of the European Union should only be taken once David Cameron's successor was elected.
Dr Muscat confirmed that the British Prime Minister asked the EU heads of states and government to postpone all decisions, including that regarding the Presidency and the appointment of a new commissioner.
He said that it was agreed it was best to wait but the general feeling was that September should be September and not December. However, it was also something the EU27 would be discussing tomorrow morning.
Mr Cameron told the dinner that it was clear that in the UK there was no understanding of what type of relationship it wants with the EU. He said that the treasury would, over the coming weeks, be working on the pros and cons of the different scenarios.
Earlier today, Maltese Prime Minister Joseph Muscat said Europe needs a political discussion on its future and not a technical one on Article 50 in the wake of the British decision to pull out of the EU.
Dr Muscat expressed disappointment that with Europe facing its biggest political crisis as a result of Brexit, what was grabbing the headlines was "the obscure Article 50".
He insisted a technical debate just confirmed the disconnect between the EU and what people were feeling. "If a second country leaves the EU, we have only ourselves to blame," he said just before entering the EU leaders' summit in Brussels on Tuesday afternoon. This could also be British Prime Minister David Cameron's last summit after giving notice that he intends stepping down by October.
Europe's reaction has been characterised by differing voices as the three founding members, Germany, France and Italy called on the UK to kick-start the divorce process as quickly as possible.
Malta and other 'newer' member states have acknowledged the need to give the UK a breather with Dr Muscat making it clear he wanted a discussion on the causes that pushed voters in Britain to reject the EU.
He added that any relationship the UK will have with the EU once it leaves must be one that clearly distinguishes between membership and non-membership.
No major shakes are expected at the summit but a decision could possibly be made on what happens to the UK presidency next year. Britain was expected to take over the EU presidency in the second half of 2017 after Malta.
Watch Dr Muscat's comments after the first session in video above.
EU council president Donald Tusk has indicated he will call an informal summit for the remaining 27 members states in September, by which time Mr Cameron would have likely stepped down to make way for his replacement.