TONY BLAIR and President Chirac remained locked in a battle of wills early today as Britain insisted that it would veto any budget deal that did not allow the prospect of changes to agricultural spending before 2014.

France hit back by saying that it would only allow a review of CAP spending in 2008 if the changes were postponed until 2014.

With the two sides deadlocked even before the most critical summit for years got under way, France and other countries piled the pressure on Mr Blair to give up more of the British rebate.

Sources said that during last night’s discussions, M Chirac had made only a brief intervention, which was solely about the need to cut the British rebate.

Angela Merkel, the new German Chancellor attending her first European summit, stepped in to mediate, but without success. Tempers frayed at the dinner attended by EU leaders, described by diplomats as a “bruising affair”. They said that demands for money well exceeded the pot available.

Mr Blair is to delay the start of the summit this morning to hold one-on-one meetings with other leaders before tabling a further proposal. But sources insisted that the room for manoeuvre was limited.

The row with France appears to be the biggest obstacle to a deal. M Chirac is demanding further big sacrifices from Britain on its £3.4 billion rebate, and was not prepared to offer a meaningful review of the CAP in return.

Officials said that there was guarded optimism about meeting the concerns of Poland over big cuts in its regional aid programme. But Britain was pessimistic about resolving differences with France.

Shortly before midnight Mr Blair played down prospects of a deal. He said that he had warned before the talks that it would be tough.

“All countries have their positions. We are talking about money and serious issues that affect individual countries. It will be a difficult and tough negotiation,” Mr Blair said. “In principle everyone wants an agreement. In practice everyone has their own interests.”

José Manuel Barroso, the European Commission President, said after the dinner: “There is still a long way to go. I think agreement is possible but the gap is still very big.”

Bertie Ahern, the Irish Prime Minister, echoed the sentiment. “Tomorrow will be a long day. People are determined to make every effort,” he said.

Göran Persson, the Swedish Prime Minister, said: “If we can agree a review clause all the other problems will become minor ones. I think we will have a deal because the alternative is worse.”

Both Mr Blair and M Chirac had had meetings with Frau Merkel before the dinner, at which Mr Blair was trying to judge whether it will be possible to reach a deal today. Frau Merkel was refusing to take sides. In the past Germany had usually lined up with France in such disputes.

British officials said after the Blair-Chirac meeting, which lasted 30 minutes, that “they were good talks” which showed that M Chirac was trying to reach a deal. French officials said the meeting had been “very good”.

But there appeared to be no weakening in either side’s position. M Chirac called for the €8 billion (£5.6 billion) that Mr Blair has agreed to forgo on the British rebate to be made permanent but argued that the cut should be nearly doubled to €14 billion (£9.5 billion.) One UK official predicted that failure to resolve the budget crisis could mean “paralysis for at least a year”.

That would deepen the continuing sense of gloom triggered by last summer’s Dutch and French referendum rejections of the EU constitution.

Frau Merkel said: “We will do everything possible. [We will] try our best . . . We cannot say now if if we will be able to come to an agreement.”

SHOULD BRITAIN GIVE UP THE REBATE?

ARGUMENTS FOR

It will help to pay for a stronger EU

ARGUMENTS AGAINST

It weakens Britain’s negotiating hand in Europe