Jack Straw presented Britain's European Union budget proposal this afternoon, offering to cut the UK's annual rebate from the union by nearly £800 million a year to help pay for the development of its ten new eastern European members.

The Foreign Secretary said that Britain's EU rebate would still increase from €5 billion a year to €7 billion a year over the budget period of 2007 to 2013, but that by agreeing to a cut, Britain would contribute €8 billion to the building of infrastructure in eastern Europe.

Britain's diminished rebate was part of an overall reduction in the EU budget proposed by Mr Straw.

As president of the EU, Britain has argued for slimmer spending and today Mr Straw outlined an €846.8 billion EU budget, down from €871 billion proposed by previous president, Luxembourg. The proposed budget would consume 1.03 per cent of the EU's combined income. The reduction of €24.2 billion will hit the EU's new members hardest, reducing their economic aid by 10 per cent.

The proposal also called for a review in 2008 of all EU spending and revenue, including the Common Agricultural Policy and the British rebate, which Mr Straw said could lead to "adjustments" before 2013.

Mr Straw said that such a provision would mean that there could be no further "fundamental change" in Britain's rebate without a similar reduction in the expensive farm subsidies that currently consume more than 40 per cent of the EU budget, chiefly to the benefit of France. France says farm spending cannot be changed before 2014.

"All spending including agriculture would be subject to a review during the coming budget period," said Mr Straw.

The President of the European Commission, Jose Manuel Barroso, criticised Britain's proposal within minutes of its announcement, calling it "unacceptable" and "unrealistic".

Senhor Barroso said the reduced budget had "no ambition at all" to fund EU enlargement: "The proposal does not foresee the level of investment required for the kind of Europe we want," he said.

"As it is, the UK Presidency proposal is unacceptable. It is simply not realistic. This proposal amounts to a budget for a ’mini Europe’, not the strong Europe that we need," he said.

Mr Straw's proposal - and the decision to "take one big hit" on the rebate and use it to cover Britain’s additional contribution to the EU to pay for enlargement - was the result of talks last night with Tony Blair.

EU foreign ministers will discuss the plan on Wednesday before the full end-of-term summit in Brussels on December 15-16. Ministers are quietly optimistic of the prospects of a deal, despite the opposition to cuts in aid encountered by Mr Blair on his trip to Eastern Europe last week.

Under the revised deal Britain is aiming for rough parity between countries of similar size in their budget contributions. Britain’s and France’s would be nearly the same at 0.4 per cent of gross national income. Britain’s has usually been higher than France’s, despite the rebate.

Mr Blair has received stinging criticism for proposing a reduction in the UK's rebate, which was won by Margaret Thatcher in 1984.

Michael Howard, the Tory leader, accused Mr Blair yesterday of "caving in". "What he said less than six months ago to the House of Commons was that the rebate would not be negotiated away, period. Nothing has changed in the past six months, he has just caved in, he’s not getting anything in return for the concessions he is now making."

Ministers are saying that when Margaret Thatcher won the rebate more than 20 years ago the last thing she would have expected would have been to use it to penalise the newer members from Eastern Europe, whose membership at that time was no more than a distant prospect. They add that British companies will gain from the expansion in those countries that EU aid will help to spur.

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