Hopes of a deal on the European Union budget hung in the balance last night after the 25 leaders failed to break the deadlock during a heated working dinner.

Countries queued up to demand higher EU spending and Jacques Chirac, the French President, rejected British demands for a review of all European spending that could curb farm subsidies before 2013.

Mr Blair emerged from the dinner at the start of a two-day Brussels summit to warn that agreement would be "very difficult" and said room for manoeuvre was "very limited indeed."

EU diplomats described the dinner as a "bruising affair" as the 24 other nations staked their claims for a bigger slice of the EU budget. British sources accused other countries of "bidding for a pot of money" that was "not anything like as big as the bids". They admitted Britain had come under pressure to give up more of the ¤5bn (£3.4bn)-a-year rebate on its contributions.

Today Britain, which holds the EU's rotating presidency, will table new proposals aimed at resolving the budget impasse. Mr Blair said: "I can see a basis for it [an agreement]. Whether that basis will recommend it to everybody, I don't know. In principle, everyone wants an agreement. In practice, everyone has got their own issues."

France and Poland emerged as the main critics of a proposal from the British presidency of the EU to cut spending from plans rejected in June. Britain wants the EU budget for 2007-13 to be set at ¤849.3bn (£575bn), down from the original ¤871bn package.

Poland, the largest of the 10 nations that joined the 25-member union last year, is fighting to reverse reductions of more than ¤4bn in its share of EU subsidies.

British officials said they hoped they could persuade Poland to back the deal but admitted that France was digging in.

Mr Blair was under pressure because almost all countries demanded he reduce the value of Britain's rebate, which is due to rise to more than ¤7bn in 2013 under the British plan.

Jean-Claude Juncker, the Prime Minister of Luxembourg, said Mr Blair needed to reflect overnight on the fact that the "overwhelming majority" of countries did not support the British proposal.

In exchange for concessions on the rebate, Britain is demanding a review of all EU spending that could take effect before 2013. The Prime Minister warned that he would veto a deal on the EU budget unless France drops its opposition to a review of EU spending that could reduce the CAP.

Earlier, the terms of a fundamental spending review emerged as a main sticking point when Mr Blair held a 30-minute one-to-one meeting with President Chirac.

In 2002, EU leaders, including Mr Blair, agreed to ceilings on farm spending up to 2013, and France is resolutely refusing to countenance any change before that date.

The Prime Minister insisted that to be meaningful, the proposed review would have to leave open the option of Common Agricultural Policy reform before 2013. His official spokesman said: "We accept that we cannot dictate the outcome of a review. Equally, we can't have a review which rules out the possibility of change."

M Chirac's spokesman said it must be clear that a revision "would not take effective before 2014. Why? Because, for Europe to function, it needs stability."

He said M Chirac had impressed on Mr Blair the need for more concessions that would remove all spending in eastern Europe from the scope of the rebate except farm spending.

M Chirac said to Mr Blair: "We want an agreement at this summit, but this agreement must be fair and everyone must pay his fair share of financing enlargement."

Downing Street described the 30-minute meeting between the two leaders, who have a frosty relationship, as "good talks" but admitted that they did not "lessen the difficulty of these issues".

A spokesman said Mr Blair had a "very good" 20-minute meeting with Angela Merkel, the German Chancellor, who is attending her first summit. The Prime Minister's spokesman said: "There is a genuine willingness here to get an agreement. Any deal is not going to be anybody's ideal deal, including ours. There is a realisation that the decisions are not going to get any easier."

As Mr Blair arrived at the summit, he said: "It's going to be very tough and very difficult. It is just as well to be frank about that right from the outset. It hangs very much in the balance."

The haggling continued over dinner last night, as the EU leaders enjoyed a "culinary patchwork" UK menu, cullen skink, a Scottish haddock soup, followed by Northern Irish rack of lamb with cabbage, a selection of British cheeses and coffee with shortbread. The wines raised eyebrows in Brussels: Tintern Parva, a Welsh white, and a red from Devon called Sharp-ham Beanleigh.

Today, Britain is expected to table revised budget proposals in the hope that it will provide enough sweeteners to secure a deal. Mr Blair is likely to surrender more of the rebate on Britain's EU contributions than the ¤8bn he has already offered to give up between 2007-13 and to bow to French demands to make the change permanent.

France has demanded that the UK gives up a further ¤6bn and a pledge that changes to the rebate are permanent. Mr Blair is willing to enshrine the changes permanently but he is unlikely to offer much more than a further ¤2bn ­ a total cut of ¤10bn ­ in a final effort to break the deadlock.

Britain's strategy is to break up the alliance against its budget proposals formed by France and Poland, leaving one of them isolated.

Mr Blair's reputation is on the line at the summit. Failure to resolve the budget dispute would mean that Britain's six months in the rotating presidency would be widely condemned as a failure. But further concessions on the rebate would leave him open to press and opposition criticism at home, especially if there were no guarantee of CAP reform.

The key issues

OVERALL EU SPENDING

In June, Tony Blair helped block a deal on EU spending for 2007-13 representing 1.06 per cent of the EU's gross national income, worth €871bn (£591bn). In the latest plan, Britain would set the EU budget at €849.3bn, equivalent to 1.03 per cent. That has been attacked by the president of the EC, Jose Manuel Barroso, as a budget for a 'mini Europe'.

EASTERN EUROPE SUBSIDIES

Eight ex-Communist countries stand to lose most from the UK's planned cuts, €12bn of which would come off their allocation for structural and cohesion funds. The UK points to the fact that new countries, historically, have never used their allocation.

BRITISH REBATE

Currently worth more than €5bn a year, though its value will rise to more than €7bn by 2013 under UK plans. Mr Blair has offered to cut its value by €8bn over the seven years. France wants the UK to surrender a total of €14bn and to make the changes permanent. Mr Blair will give more ground, but not much more than €2bn, and is ready to make the reform permanent.

SPENDING REVIEW CLAUSE

Mr Blair demands a review of all EU spending in 2008-09. The UK also insists there must be a possibility of this leading to changes before 2013. France agrees to a review, but says its findings must not be implemented by 2013.

VAT IN RESTAURANTS

France has long promised to bring this VAT - currently at 19.6 per cent - into line with the 5.5 per cent charged at fast-food outlets. But an exception from minimum VAT rates needs to be agreed unanimously, and mysteriously this had made an appearance on the agenda.

MACEDONIA

Due to be given the status of candidate for EU membership, it could be held hostage to the budget row. France says enlargement cannot be given the green light if the UK is not willing to give up its rebate.