The Labour peer, who was speaking as the European Union (Referendum) Bill reached its second reading in the House of Lords, said he believed it was possible to win the argument for Britain to remain part of the EU if it was put to a public vote.
He said: "We need to concentrate on using all of our influence and energy in building up Britain's influence in Europe, not driving Britain out of Europe.
"This Bill is not about changing or improving the EU, it is indeed stage one in raising impossible demands on the European Union in order to create the pretext for leaving it."
"My message to the Government is stop grandstanding to the Ukip gathering. If you are really serious about European reform, you have to go out and work for it and join with others in achieving it," he added.
The former EU trade commissioner Peter Mandelson has accused eurosceptic politicians of "operating a sort of Sopranos-style protection racket inside the Conservative party".
He told BBC1's Andrew Marr Show:
The UK isolation party and their fellow travellers in the Conservative party are ... operating a sort of Sopranos-style protection racket inside the Conservative party. They are saying ... 'give us what we're demanding or we're going to burn your home down'. In my view the Prime Minister has got to say 'enough is enough'.
David Cameron must “turn down the heat” on Europe or risk losing allies in his attempt to reshape Britain’s relationship with Brussels, former European Commissioner Lord Mandelson has told The Times (£).
The former Labour Cabinet minister said Britain’s natural allies in Europe were losing patience with the Government’s “foot-stomping strategy” of threatening vetos if Mr Cameron does not get his way.