Under the system, MPs would be able stop new laws coming into force if they club together and win support from 55% of parliaments across the bloc.
Members of parliament would have up to 12 weeks to convince those in other countries that the legislation needs to be blocked.
No 10 said the system allows David Cameron to fulfil a key manifesto commitment and answer one of the key demands from his party members in Westminster - to give national parliaments more say in EU laws.
The red card is one of a number of proposals in the "new settlement" between the UK and EU that will be published by European Council President Donald Tusk later today.
EU Reform Talks
The proposals will be circulated to other EU countries before a summit of leaders on 18 and 19 February.
If Mr Cameron is successful in convincing other leaders of the need for the reforms, he would be free to hold a promised referendum on whether to remain in the 28-member bloc - probably in early summer.
There were doubts on Sunday about whether an agreement would be reached when Mr Tusk left a dinner with the PM after only one hour and 45 minutes.
A Number 10 source said: "The draft proposal provides for a legally binding decision allowing 55% of national Parliaments to club together and force the Council to either stop the proposed legislation or amend in a way that addresses the concerns raised by Parliaments.
"This will strengthen the power of Westminster to stop unnecessary EU laws and addresses concerns that the current 'yellow card' system has not proved strong enough.
"It ensures that the European Commission cannot just ignore the will of national parliamentarians and delivers greater democratic control over what the EU does."
The source said a period of intense negotiation was expected to take place over the next few weeks before the summit with a view to securing support for all the "ambitious proposals".
On Sunday, it emerged that Mr Cameron and Mr Tusk had reached agreement on one of the most controversial proposals for EU reform - the Conservative manifesto pledge to ban in-work benefits for migrants.
Number 10 said EU officials were prepared to accept that Britain's public services were sufficiently overwhelmed to trigger an 'emergency brake', which would allow Westminster to stop paying the benefits to migrants for four years.
The emergency brake proposal was put forward by Brussels as an alternative to Mr Cameron's plan to impose a unilateral four-year curb which other member states regarded as being in breach of the freedom of movement principle.
Another proposal believed to be on the table is a reform to prevent non-EU nationals using sham marriages with Europeans to win the right to remain in the UK.
Downing Street denied the UK was seeking a veto over further integration in the eurozone, insisting that Britain was instead asking for a system to be created to ensure any concerns from non-single currency members are properly addressed.
The "red card" proposal was dismissed by the main group campaigning for Britain to exit the EU Vote Leave.
Chief executive Matthew Elliott said: "What the Government is asking for from the EU is trivial - these proposals will not take back control from the EU. These gimmicks have been ignored by the EU before and will be ignored again as they will not be in the EU treaty."
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