Tony Blair and Gordon Brown dramatically turned up the heat in a row with France over Britain's EU rebate today, calling for a "fundamental debate" over Europe's finances that should include the massive subsidies enjoyed by French farmers.

Speaking after a meeting with leaders of the European Parliament, the Prime Minister strongly defended the £3 billion annual budget rebate handbagged out of EU leaders by Margaret Thatcher in 1984.

"The rebate is there for a reason - it is to correct what would otherwise be a quite unfair distribution of European money," Mr Blair told a Downing Street press conference alongside Josep Borell, the Parliament's Spanish president.

That unfairness, he said, came from European funding for agriculture, which soaks up 40 per cent of EU funds, even though only five per cent of its population are employed by the sector. Agriculture accounts for less than two per cent of Europe's economic output.

"If you have a fundamental review of how Europe spends its money, then everything is open to debate," Mr Blair added. "If people want to look again fundamentally at the Common Agricultural Policy, of course everything then can be looked at properly."

But France and Germany kept up the pressure on Britain. President Chirac, who yesterday called on the UK to give up the rebate as "a gesture of solidarity", met Chancellor Schroeder of Germany for the second time in a week and afterwards repeated his demand.

Asked about M. Chirac's suggestion - and his refusal to countenance any parallel renegotation of farm support - Mr Blair said: "You can't simply rule things out and say that they're excluded from negotiation."

He added: "We just had a situation where two founding members of the European Union have voted 'no' to the constitution of Europe. There needs to be now a fundamental debate about Europe's future."

Mr Blair's comments suggest that EU leaders have next to no chance of fixing a new seven-year EU budget at a summit meeting next week where they also have to find a way forward after the setbacks on the constitution. The summit next Thursday and Friday is the last planned before Britain takes over the rotating presidency of the 25-nation bloc on July 1, a position that the Government now appears determined to use to force a full rethink of the EU's priorities.

France and Germany have also been angered by the UK's decision to shelve its own referendum on the document - although the British position was bolstered today when Anders Fogh Rasmussen, the Danish Prime Minister, dismissed a German suggestion that the EU should delay discussion of the treaty until after the remaining referendums. Mr Rasmussen, like Mr Blair, has no desire to fight and lose a national vote on an agreement that is already dead in the water.

Mr Blair's language today was comparatively moderate compared to that of the Chancellor, who used a BBC radio interview to accuse EU member states of blaming their own economic failures on the British rebate. Mr Brown said Britain would not hesitate to use its veto in the EU Council of Ministers.

"To suggest that the problem that Europe faced, or that the referendums were lost, or unemployment is 10 per cent, because of the British rebate is to wish away problems that Europe must face up to," Mr Brown told the Today programme.

Rejecting M. Chirac’s criticisms, he pointed out that the UK had contributed twice as much to the EU as France over the past 20 years. But thanks to the unreformed Common Agricultural Policy, France was expecting nine billion euros (£6.5 billion) for its farming alone by 2013.

The Chancellor said: "When one country for one item of policy is taking up such a huge share of the European Union budget, then there are bigger issues to discuss before you can reach a settlement than simply discussing, as one or two countries want to do, the British rebate.

"The issue about Europe is not simply the budget. Everybody looking at the rejection of the constitution by the Netherlands and France, anybody looking at the 9-10 per cent unemployment we have got in Europe - 20 million people unemployed - and then anyone looking, as I have done, from China’s perspective at the challenges of globalisation facing Europe ... knows that these are the problems that Europe must face up to."

After French voters rejected the EU consitution - the 'no' vote was especially strong in rural areas that have survived for decades on handouts from Brussels - M. Chirac will be aware that now is not the best time to ask his country to accept a reduction in agricultural support.

A briefing note to European leaders, seen by The Times, spells out the main lines of Britain's agenda for its six-month presidency of the EU Council of Ministers, objectives that appear guaranteed to raise French hackles even further.

They include pushing open the single market in services - anathema to the French, who fear that cheap workers from poorer European countries will take jobs from French people - and reducing barriers against the free operation of financial institutions, a reform that would benefit the City of London.

Britain is also determined to push ahead with talks on Turkish membership of the EU, due to start on October 3. Fears of the likely impact of Turkey's entry were seen as a key factor in both the French and Dutch rejection of the constitution.

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