The Prime Minister had promised “one more try” to rescue the key constitutional reform after his authority was rocked by a 91-strong rebellion by his own MPs last month.
But he is now expected to declare within days that the package is dead in the water, opening the door to retaliation by the Lib Dems over boundary change legislation.
A spokesman for the junior coalition partner said there would be “consequences” of any failure to see through Lords reform, a key party priority.
“Our position is pretty well established on what would happen if they failed to deliver.
“A deal is a deal,” he said, insisting however that discussions over a way forward were ongoing.
He dismissed reports that the party would accept the U-turn in return for other policies on energy or party finance as “for the birds”.
Senior Lib Dems, including party president Tim Farron, have warned the junior partner would block constituency boundary changes wanted by the Tories if Lords reform was abandoned. “The Conservatives need to remember that if they don’t keep their part of the bargain then, of course, boundary change should not happen,” Mr Farron said in April.
After the Commons reverse, Mr Clegg told activists they should “fully expect the Conservatives to deliver this crucial part of the coalition deal – as we have delivered”.
Lords reform is seen as particularly important to the Lib Dem leader following defeat in the referendum on another keystone policy – the introduction of AV voting for Westminster elections.
Mr Cameron’s move comes as senior figures across the two parties work on a new agreement to cover policies for the next two years.
The Prime Minister is believed to have decided he has no chance of winning over sufficient back-bench support to pass a timetable motion for the House of Lords Reform Bill in the autumn.
A damaging government defeat on such a motion – required to stop it being “talked out” and bogging down other parliamentary business – was avoided only by withdrawing it at the 11th hour.
Speaking at the time, after he agreed a pause to find a solution, Mr Clegg said: “A deal’s a deal and it’s important you stick to that deal and you stick to the contract. It’s a clear commitment in the coalition agreement.”
Labour backs the principle of Lords reform but sided with Tory rebels in opposing the proposed time limit on debate, forcing the rethink.
Shadow justice secretary Sadiq Khan said: “Nick Clegg marched his MPs through the voting lobbies in support of the harsh and unfair policies of this Tory-led government in anticipation of receiving Lords reform in return.
“But now Nick Clegg may end up with nothing, ruthlessly exposing his naivety. Millions of people struggling through the tough economic times will question his political priorities.”
He added that Labour had always been committed to Lords reform.
The boundary review is being carried out as part of proposals to cut the number of MPs from 650 to 600 but is expected to benefit the Tories.