British Prime Minister Tony Blair on Friday said Britain would only negotiate on its rebate - worth about $5.5 billion annually - if the European Union agreed to overhaul agricultural spending, which accounts for more than 40% of the EU's budget.
Diplomats said the Netherlands and Sweden also demanded relief, complaining their annual payments to the bloc are also excessively high.
A last-gasp attempt at compromise by the EU's Luxembourg presidency collapsed, diplomats said, as deep differences between Britain and most of its 24 partners proved impossible to bridge.
The EU presidency, held by Luxembourg Prime Minister Jean-Claude Juncker, confirmed the collapse. "The president acknowledged the failure of his new proposal," said one official.
Shorly after, Juncker said the EU "is in deep crisis".
But in a desperate last gasp, the 10 EU newcomer states refused to accept the failure, calling for new efforts to strike an accord, a diplomat from the EU's presidency said.
It was unclear whether the call would be heeded.
The failure to agree on a budget for 2007-2013 deepens the sense of crisis triggered by the French and Dutch referendums rejecting a proposed EU constitution, and reinforces impressions that the 50-year process of European integration has lost direction.
Luxembourg's Prime Minister
Juncker said EU was in crisis
French President Jacques Chirac said he "deplored" Britain's attitude during the tense negotiations in which the British government refused to surrender its annual EU
rebate. "It's a bad result for Europe," Chirac said.
German Chancellor Gerhard Schroeder said, "We are in one
of the worst political crises Europe has ever seen. We
could not get an agreement because of the stubbornness of
Great Britain and the Netherlands".
Blair argued it is necessary to balance the outsized agricultural subsidies that flow far more generously to France and other continental countries than to Britain.
British PM Blair (L) refused to
surrender annual EU rebate
He vented his frustration at suggestions he was the main cause of the summit's collapse, insisting four other countries also were unable to reach agreement.
In an apparent jibe at Chirac, he said: "I'm not prepared to have someone tell me there is only one view of what Europe is. Europe isn't owned by any of them, Europe is owned by all of us."
He said it was "bizarre" some leaders thought agricultural subsidies represented "the future of Europe ... the crediblity of Europe suffers when Europe doesn't concentrate on the right things".
France in particular insisted that Britain's rebate - won two decades ago by Margaret Thatcher - should be eliminated.