Britain failed to impose its vision of radical reform of the EU’s Common Agricultural Policy yesterday when Brussels announced a watered-down review of the €40 billion scheme that will keep handouts flowing to farms for years to come.

Alistair Darling, the Chancellor, was rebuked by the European Commission for demanding much deeper cuts and an end to direct payments as it argued for continuing subsidies despite rising food prices.

Ministers now face a bruising battle over the next six months to preserve what they regard as the advances of yesterday’s proposals in the face of determined opposition from France and Germany.

The review has exposed a deep split in the EU between countries such as France and Germany, which believe that food shortages make the argument for subsidies to keep farms in business, and those such as Britain, which regard rising food prices as an opportunity to scrap handouts. Final decisions will be made in December.

Under the plans put forward by Mariann Fischer Boel, the EU Agriculture Commissioner, payments for 10 per cent of land to be set aside will be scrapped, freeing up to five million hectares for production at a time of global shortages. Milk quotas will be phased out by 2015.

However, ministers are worried that the scheme to pay farmers more for environmental management does not go far enough and that an allowance for the flexible use of 10 per cent of payments by national governments could allow a return to old-fashioned subsidies for unviable farms.

Mrs Fischer Boel said that the decision to end payments for set-aside land would allow farmers to respond to the demand for more crops. She criticised the Chancellor’s demand for more extensive cuts in EU payments and import tariffs. “I probably need not say Darling [but] someone suggested that we simply scrap the CAP. I think that the CAP is vital for our countryside and also meeting other public demands,” she said yesterday.

Under the plans, a proportion of money for larger farms will be diverted to rural development projects. Farms receiving handouts of more than €300,000 (£240,000) a year would have 22 per cent of that siphoned into countryside-enhancing schemes by 2012.

The proposal to increase the rate by 2 per cent a year falls short of the hopes of reformers and will only lead to the rest of Europe catching up with Britain. Ministers have also cautioned that the method used will fail because huge farms will find legal ways to sub-divide to avoid cuts in their handouts.

Neil Parish, the Conservative MEP who chairs the European Parliament Agriculture Committee, said: “The Government has been wrong-footed. By coming out and saying they want to scrap the traditional CAP, they are not seen as putting forward a good argument for reform.”

Hilary Benn, the Agriculture Secretary, cautiously welcomed the proposals. “Good progress has been made in reforming the CAP in recent years, but much more is needed to boost farm competitiveness, protect the environment, improve value for money and address concerns about food prices,” he said. “\ must also phase out all the price-support measures which have kept consumer prices high and the export subsidies which have undermined farmers in developing countries.”

Horst Seehofer, the German Agriculture Minister, said he was “very critical” of proposals to divert money from big farms to environmental projects. “The Common Agricultural Policy is healthy. It needs only some medicine drops to be strengthened,” he said.

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