Nick Clegg has hit out at the Tories over their immigration policies, claiming his coalition partners were "no longer standing up for business" by backing tougher curbs on migrants.
The Liberal Democrat leader also accused both the Conservatives and Labour of "arrogance and cowardice" for suggesting that they could form a minority administration in the event of a hung parliament after the 2015 election.
But he faced criticism from grassroots activists about his focus on the European Union, with one councillor telling him "no one on the doorstep cares".
Answering questions from the audience at the Liberal Democrat spring conference, Mr Clegg singled out Tory Immigration Minister James Brokenshire for criticism, following a speech in which he s aid the wealthy had been the main winners from Britain's openness to labour from abroad, because they had to pay less for tradesmen and services.
He said: " Over the last 24 to 48 hours we have seen in many respect some of the most ugly sides of the immigration debate. It is truly dispiriting to see the Conservative and Labour parties, the two largest parties in British politics, driven, as far as I can see, entirely by panic on this issues.
"You have got a Conservative Party which is no longer standing up for business - quite a big development, that. I think, personally they do so at their peril. The Institute of Directors absolutely slammed the irresponsible speech made by a Conservative minister this last week on immigration.
"And yet the Labour Party who won't stand up against xenophobia. Instead of trying to actually reduce the temperature of the debate, they try and stoke it."
Mr Clegg, whose hopes of remaining in power after 2015 depend on another coalition, attacked both Labour and the Tories over reports suggesting they could rule out any power-sharing deal in the event of a hung parliament.
Reports suggest that David Cameron is privately considering ruling out a coalition and promising to rule at the head of a minority administration if the Conservatives fail to secure an overall majority, and Unite general secretary Len McCluskey has also reportedly suggested that Labour should go it alone even if they fail to win the most seats.
Mr Clegg said there was an assumption within Labour that "government will drop into their lap" and they did not need to work for it.
"I have found it very striking to see this McCluskeyite tendency in both the Labour and Conservative Party who are now going one step further and saying 'even if we don't have a majority, we will govern Britain', which overlooks the slightly old-fashioned democratic principle that you have to win a majority before you have a right to say you will govern Britain.
"All of this just reveals a really unpleasant mix of arrogance and cowardice on the part of the two main parties, the two larger parties in British politics."
Asked why he was not campaigning for an outright Lib Dem win, Mr Clegg said: "I would love to be prime minister", to applause from the audience.
But then there was an awkward pause followed by laughter as he said: "Now let me explain how I'm getting there."
He added: "You can't put coalition on a ballot paper, what you can say is this: the alternative, in other words a Conservative-only government, or a Labour-only government, would in my view be very, very bad for this country indeed."
Councillor Jill Hope, from Northamptonshire, questioned the conference slogan "in Europe, in work", saying: "No one on the doorstep cares."
Mr Clegg told her: "People do care about work, they do care about money in their pockets, they do worry about crime on their streets, they do worry about what to do about climate change.
"You can't do anything about any of those things unless you work with other countries."
Business Secretary Vince Cable also tore into the Tories over their immigration policies, as the Lib Dems adopted proposals to make it easier for migrants' families to join them in the UK.
Mr Cable accused his coalition colleagues of tending to "fan the flames of prejudice" over the issue.
The Lib Dem conference backed measures which could allow elderly relatives of migrants to join them in the UK if they paid a levy to cover their likely health costs.
Science, engineering and maths students from outside the EU would be allowed to work in the UK for up to three years after graduating and the plans would allow the Migration Advisory Committee to increase the number of people able to bring a spouse to join them in the UK.
Asylum seekers would be required to seek work after six months in the UK, and EU migrants would have to wait six months before being able to access the UK's benefits system under Europe-wide plans supported by the Lib Dems.
The Business Secretary said the Lib Dem proposals would help "persuade the public to calm down" about fears of the impact of immigration.
Speaking at the Lib Dem spring conference in York, Mr Cable said: "It was never more necessary to have a party that was willing to stand up on this toxic issue and address it from the point of view of realism and evidence and fact.
"The Labour Party will always hide in a bunker when difficult issues like this come along and the Tories tend to fan the flames of prejudice and then they panic when it gets out of control and parties even further to the right take over.
"We have an acute responsibility here."
He said Liberals had stood up for the rights of immigrants, be they Jews from eastern Europe in the early 20th century, East African Asians and citizens from Hong Kong.
Mr Cable said: "We have got the same challenge today and we have got to meet it. One of the ways of meeting it is to be realistic and address people's genuine concerns."
The party also backed calls for an early review of the Government's national planning policy framework and a public consultation and measures to limit central government interference in local decisions.
The conference supported constitutional reforms towards a federal UK, including devolving powers to Cornwall.
The coalition's welfare reforms were also questioned, with activists endorsing a motion on food poverty stating that "current measures offer inadequate protection to some families in deepest need" and calling for "an urgent independent review into the relationship between benefit delay, error or sanctions and the growth of food poverty".
Treasury Chief Secretary Danny Alexander used his speech to claim credit for the Lib Dems for the economic recovery and to signal the party's commitment to raising the income tax threshold to £12,500.