France has led the struggle to remove a multibillion-euro annual rebate from the stubborn grip of British Prime Minister Tony Blair. But Blair has refused to budge.
The Luxembourg presidency launched a late effort to snap the deadlock over long-term financing but leaders were full of gloom about the prospects for a deal.
European leaders had hoped an agreement on the 2007-2013 budget would let them present a united front, averting paralysis after French and Dutch voters stunned the bloc by ditching the EU constitution.
"I'm pretty sure we won't get the financial perspectives through at this summit," Luxembourg Prime Minister Jean-Claude Juncker, whose country holds the EU presidency, said on the eve of the gathering.
Italian Prime Minister Silvio Berlusconi agreed.
"There is too great a distance between the proposal we have today and the demands of each country," he said.
But just 24 hours before leaders were to meet, Luxembourg threw up a new offer to freeze, but not cut the British rebate. The proposal was being studied by London.
Britain's Blair (L) has refused to
give up a multibillion-euro rebate
"We can't give you any reaction, not straightaway," said one source hours after the new proposals were revealed in draft texts distributed to national delegations in Brussels.
The two crises - the budget row and the turmoil over the constitution - have unmasked deep differences over the EU's direction, from how it communicates with ordinary Europeans to its plans to enlarge further and even over the future of its single currency, the euro.
Britain's Blair said the EU needed a "fundamental debate" about its future.
Britain, while refusing to consider surrendering the rebate, is also pushing for a rethink of the EU's Common Agricultural Policy (CAP), which gives generous subsidies to farmers, especially those in France.
British Foreign Secretary Jack Straw warned that London would not be afraid to use its veto to block the EU budget if the rebate - won by former British prime minister Margaret Thatcher - was under threat.
"Each [state] must contribute to the European effort in proportion to its means and the United Kingdom must play its full part in the financing of an enlarged Europe"
French President Jacques Chirac
This was bluntly rebuffed by French President Jacques Chirac.
"Each [state] must contribute to the European effort in proportion to its means and the United Kingdom must play its full part in the financing of an enlarged Europe," he said.
German Chancellor Gerhard Schroeder, too, appealed for reason, saying EU leaders should be "conscious of their responsibilities ... in this difficult period for Europe".
European Commission chief Jose Manuel Barroso warned the bloc could face long-term "paralysis" if leaders fail to reach agreement on the budget and constitution.