British Prime Minister Tony Blair has warned talks on the UK-led budget proposals will be "very tough", with the result "very much in the balance".

French President Jacques Chirac has said any agreement must be based on a "lasting" cut in the UK rebate.

The UK says France and other EU states must agree to agricultural reform.

Criticism of the latest British offer, which includes an increase in the budget, more money to new member states and no new cuts to the UK's own rebate, has been widespread.

Opening the summit, European Parliament President Josep Borrell said the body would not agree the proposal as it stood - but insisted a deal would be negotiated eventually.

Fair share

Arriving in Brussels, Mr Blair said he and Britain, which currently holds the EU presidency, were "going to do our best to reach an agreement".

He held last-minute talks with Mr Chirac before the summit.

"We want an agreement at this summit, but this agreement must be fair and everyone must pay his fair share of financing enlargement," a spokesman quoted Mr Chirac as saying.

France wants to defend the EU's agricultural policy from any attempt at reform and demands the UK gives up more of the rebate it receives on its budget contribution to help pay for EU expansion.

Britain says it will offer no further concessions unless France agrees to at least allow the possibility of serious reform of agricultural policy in three years' time.

Germany's foreign minister has said he believes agreement is possible on the UK proposal.

However, German Chancellor Angela Merkel told reporters that Germany would not accept a deal "at any price".

Austrian Chancellor Wolfgang Schuessel said he believed the 25 nations were moving in the right direction towards a deal.

Angela Merkel has said she will not accept a deal "at any price"

European Commission President Jose Manuel Barroso called on EU leaders to work out a "credible" budget deal to fund the bloc's expansion into Eastern Europe.

French and Polish foreign ministers wrote in a joint letter to the Financial Times newspaper in Britain that, even after revisions submitted on Wednesday, the UK proposal could not form the basis of agreement.

The letter said the UK had championed the enlargement of the EU and should be willing to cover the costs of admitting the 10 countries that joined last year.

In theory, EU leaders have until March to hammer out a deal, but planning for long-term projects could be hurt, the BBC's Oana Lungescu in Brussels says.

The EU should carry out a comprehensive reassessment of the financial framework, covering both revenue and expenditure

If its leaders fail to agree on the budget now, they will find it hard to agree on almost everything else, she adds.

The new UK proposal would increase the 2007-13 budget by 2.5bn euros (£1.7bn) compared with its first proposal, issued a week ago.

It leaves untouched the earlier proposal to cut the rebate by 8bn euro (£5bn) over seven years, increasing the UK's net contribution to the budget.

The new proposal includes sweeteners for a number of countries, but there is nothing for France, Germany or Italy.

Poland, which would get an extra 1.2bn euros (£814m), said it would veto the proposal as it stood.