Angela Merkel, the new German Chancellor, dashed Tony Blair's hopes of finding a new EU ally today, refusing to take sides in a budget dispute which has deadlocked Europe.

Frau Merkel - who arrived in Downing Street after talks in Paris with Jacques Chirac yesterday - sidestepped questions on the row, saying only that she wanted to forge closer Anglo-German ties.

At a press conference in Downing Street after meeting the Prime Minister, she told reporters: "With this visit I want to underline that Germany and the new German Federal government has a great interest in maintaining good friendly relations with France, but not just with France but particularly with the UK."

Pressed on whether she would support French demands for Britain to give up its £3 billion annual rebate in order to secure a deal on a new EU budget, the woman once dubbed 'Germany's Mrs Thatcher' remained ambivalent.

"I want to have success and the situation of each country has to be taken into account. If anybody forgets one country with its interests you won’t get any success," she said.

Germany's position is considered crucial as EU ministers prepare for a crunch meeting over the stalled budget next month. Analysts said that by focusing on "success" she appeared to be moving towards the British position, which demands reform of agricultural subsidies.

Frau Merkel, however, refused to speculate about the prospects for a deal at next month’s summit in Brussels: "I don’t really want to look into the crystal ball," she said. "We have three weeks left. Everybody will want to make their contribution and then we will see."

Mr Blair is under increasing pressure to reach a deal on future financing before the year's end: the deadlock has placed him in an uncomfortable decision as Britain holds the rotating presidency of Europe but is blamed by some for being the chief cause of the deadlock.

Negotiations on the budget for 2007-2013 collapsed in acrimony in June, when Britain refused to give up its lucrative budget rebate and France refused to trim European subsidies to its farmers. Mr Blair believes the EU's Common Agricultural Policy, which takes up about 40 percent of the budget, squanders money that should be invested in science, technology and education.

Merkel's predecessor, Gerhard Schröder, was a close ally of Chirac, and Frau Merkel also made clear that Germany's special relationship with France is not about to change. In Paris yesterday she declared that a strong French-German axis was "not only important for our two countries but also necessary and desirable for Europe."

Mr Blair, who had hoped to find a strong ally and fellow reformer in the new Chancellor, said that he looked forward to developing a "very good and close working relationship".

He acknowledged, however, that a deal would not be easy: "Obviously it is going to be difficult and tough but we will do our level best to try to get an agreement," he said.

Greg Hurst, Political Correspondent for The Times said: "This was very much an introductory meeting and the talks were of a general nature, rather than being on detailed issues of policy. Frau Merkel wasn't giving anything away."

John Palmer of the European Policy Center, a Brussels-based policy institute, said that Merkel's direction may breathe new life into the British-German relationship, which had grown testy because of strained relations between Blair and Schröder - largely over the Iraq war.

Nevertheless, Palmer said he expected Merkel to join the chorus of European voices demanding that Britain secure a deal on future financing by the year's end.

"There is always a honeymoon period in any new relationship, and I think there may well be an opportunity to establish new mood music," he said.

Mr Blair also met the Polish prime minister, Kazimierz Marcinkiewicz, whose country, like other new East European members of the bloc, is impatient for a budget deal.

Mr Marcinkiewicz said that Britain and France had to overcome their "selfishness". "All countries are interested in the matter of the budget but the new member countries of the European Union are particularly interested because each euro that reaches them is devoted to development, to economic growth," he said.

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