Tony Blair warned fellow European leaders today that he would only be prepared to give ground on Britain's EU rebate in return for a fundamental reform of the budget-setting process as the crisis engulfing Europe moved closer to deadlock.

Mr Blair said he would be "diplomatic but firm" as he began a whirwind tour of European capitals following a meeting with President Putin in Moscow this morning.

Mr Blair said: "The context for this discussion is one in which two countries have now voted against the European constitution. Why? Because people in Europe did not feel that sufficient attention was being paid to their concerns about Europe and its future.

"When we come to debate the future financing of the European Union, let us bear that in mind.

"We can’t discuss the British rebate unless we discuss the whole of the financing of the EU, including that 40 per cent of the budget goes on agriculture which employs only 5 per cent of the people."

The ill-timed row threatens to dominate a 24-hour summit in Brussels starting on Thursday. Tony Blair and Mr Straw have until last week said that the £3 billion discount Britain has annually clawed back from Brussels since 1984 would remain "non-negotiable, period".

Both men have since suggested that the rebate would be up for debate only if the French were prepared to renegotiate the Common Agricultural Policy and cut the EU's budget - which France has flatly refused. Mr Straw told Radio 4's Today programme: "Of course there can be movement in the symptom of the problem if you get a solution to the problem itself. The problem itself is the overall structure of spending as well as the overall level of spending."

Britain’s increasing prosperity since Margaret Thatcher famously bullied the rebate out of Brussels in 1984, and the expansion of Europe to include ten mostly ex-Communist countries, has put the UK in a minority of one as the deadline for reviewing Britain's rebate approaches.

The Government says that it is sympathetic to the complaints of poorer member states that they should not be subsidising richer Britain, but insists that the rebate cannot be sacrificed. The UK remains the second-biggest contributor to the EU’s operating budget, behind Germany.

The looming crisis meant that Mr Blair's two-day tour of Europe, officially to shore up support for his twin G8 presidency aims of tackling poverty in Africa and climate change, is likely to be eclipsed by the financial tiff closer to home.

Philippe Douste-Blazy, the French Foreign Minister, said that Britain would have to compromise to stop the European political "crisis" from worsening.

"After the French ’no’ and the ’no’ in the Netherlands on the (EU) constitution, we are in crisis, there’s no hiding it," he told RTL radio.

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