"It will be open to individual ministers to take a different, personal decision while remaining part of the government," the British Prime Minister told MPs in the House of Commons today.
His government has pledged to hold a referendum on whether the UK stays in the EU before 2018.
Anumber of British Cabinet ministers are thought to favour an out vote, leading to a British exit dubbed "Brexit", with Cameron expected to campaign for Britain to remain in the EU.
"It is the nature of a referendum that it is the people not the politicians who decide. Ultimately, it will be for the British people to decide this country's future by voting In or Out of a reformed European Union in the referendum that only we promised and that only a Conservative-majority government was able to deliver," Cameron told Parliament.
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The British PM is hoping to complete negotiations with Brussels at a summit in February, at which he wants to win concessions on national sovereignty and migrant benefits.
Ken Clarke, a pro-Europe Conservative MP, has warned that the decision to allow a free vote to the Cabinet on the issue could split the party.
"You resign, you step down. You don't stay in office and campaign against the government in which you serve," he warned.
Former deputy prime minister and another senior party leader Lord Heseltine, who last month warned of a Tory "civil war" if ministers were allowed to openly defy the Prime Minister and suggested Cameron would be seen as a global "laughing stock" if he allowed it, declined to comment on the Cameron's decision.
Matthew Elliott, chief executive of Vote Leave, said: "The referendum could be as little as 170 days away, so ministers should be allowed to campaign openly as soon as the renegotiation is complete - and certainly no later than the end of the European Council in February.
"The British people deserve to hear where their elected representatives stand on this vitally important issue. We've had lots of useful meetings with government ministers and look forward to working with them much more closely now.