TONY BLAIR is prepared to walk away from the negotiating table this week and scupper a deal on European Union funding if the French continue to press for an end to the £3 billion British rebate.

The prime minister could hold the rest of Europe to ransom by refusing to agree long-negotiated increases in the EU budget if France and other countries keep pushing the issue.

Despite suggestions by Blair that the rebate is “open to debate” if President Jacques Chirac agrees to reform the expensive common agricultural policy, Downing Street knows the French have no intention of giving way because of the huge handouts to French farmers.

Government sources say the chances of a deal over the EU budget on Thursday and Friday are now “less than 50%” thanks to Chirac’s remarks. They launched a tirade of abuse at the French president for “dumb” and “diversionary” tactics by raising the British rebate to deflect attention from the rejection of the EU constitution by the French people.

“Because he is in a weakened position and he doesn’t want the summit to be about the constitution, he created this row to divert attention,” said a senior Whitehall source.

Yesterday Blair was criticised by the Tories for “rising to the bait” set by Chirac by suggesting he might negotiate on the rebate — after the French president goaded the prime minister by calling on him to make “a gesture of solidarity for Europe”.

It was 21 years ago almost to the day that Margaret Thatcher emerged from a heavy night of European negotiations at Fontainebleau to win the British rebate. An exhausted French president François Mitterrand finally relented, saying: “Of course, madame prime minister, you must have it.”

The “it” in question was the rebate, the cash Britain gets back from Brussels every year as compensation because European Union subsidies are skewed to other nations.

When Tony Blair goes to Brussels on Thursday, he faces an equally big moment. Relations with France have sunk to a new low after a week-long slanging match with Chirac and the prime minister is under great pressure to give up or at least freeze the rebate.

Downing Street insists Blair will stand firm. His comments last week that the rebate was “open to debate” if France was willing to renegotiate the massive subsidies it gets from the common agriculture policy were not, as some have suggested, evidence that Blair was caving into pressure. No 10 knows France will not do this. Instead, Blair’s remarks were a ploy to expose Chirac’s unjustified intransigence.

“In the end, we have been through this so many times before,” said a senior Whitehall source. “Everyone has a go at our rebate, whoever is in power in France. We are in a strong position because whatever deal there is in the end has to be done by consensus.

“It was dumb tactics by Chirac if he wanted to do a deal. If there was any room for manoeuvre it has gone. It’s an artificial row.”

Downing Street believes Chirac’s tactics are transparent: an unpopular French president, with a struggling economy and weakened by the decisive “non” to the EU constitution, is trying to divert attention away from his own problems.

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