Sources said the dispute was jeopardising plans to issue the anti-terrorism declaration, and two other statements, by the 25 EU nations, Israel and its Arab neighbours.
The draft text of the Code of Conduct on Countering Terrorism declared "all peoples have the right of self-determination," but that "terrorist attacks cannot be justified or legitimised by any cause or grievance".
Arab delegates sought to add a qualification, proposing text that said nothing in the anti-terrorism code contradicts "the right of peoples under foreign occupation to strive to end it in accordance with international law".
The EU and Israel objected, saying that terrorism can never be justified. Diplomats worked into the night of Sunday and into Monday. When the leaders returned for a second day of talks on Monday, there was still no agreement.
Summit participants planned to issue a declaration of their common vision on the need for economic and political reforms in nations on the Mediterranean's eastern and southern rims. The countries have received 20 billion euros ($23.5 billion) in grants and soft loans from the EU since 1995 but remain mired in poverty.
One diplomat, who asked not to be named, said the summit might end with a declaration by Tony Blair, the British Prime Minister who was hosting the meeting, on his own behalf.
Issuing no summit declarations would be a bad finish to a meeting that got off to a bad start when only two of the 10 invited Mediterranean leaders showed up: Palestinian President Mahmoud Abbas and Turkish Prime Minister Recep Tayyip Erdogan.
Delegates failed to agree
despite late-night discussions
The absence of Israeli Prime Minister Ariel Sharon and many Arab leaders gave centre stage to Palestinian President Mahmoud Abbas, who held one-on-one meetings with Mr Blair and Angela Merkel, Germany's new Chancellor, and other European leaders.
Merkel told the summit that Europe could win the support of North African and Middle Eastern nations in the fight against terrorism and illegal immigration only "if we offer these countries an economic perspective".
Leaders from Egypt, Algeria, Israel, Jordan, Syria, Lebanon, Tunisia and Morocco stayed away from the meeting, with reasons ranging from a medical problem for Algerian President Abdelaziz Bouteflika to political unrest at home for Egypt's President, Hosni Mubarak.
The EU had high hopes for the summit, which assessed a decade of economic outreach that is widely regarded as having failed to deliver results.
In the years ahead, the EU plans to link its aid to economic and political reforms in countries that shed their authoritarian ways. Its aim remains, however, to craft a
Euro-Mediterranean free-trade zone by 2010.