The Germans say the EU budget cannot be decided without Britain

Edward McMillan-Scott, a vice president of the European Parliament, said a link between the rebate and wider budget reforms had only appeared this week.

The UK's European rebate would only be up for negotiation if there was a full EU spending review, Mr Blair had said.

Mr McMillan-Scott said when Margaret Thatcher was premier "she made the case for the British rebate very strongly".

"There was a well-laid out campaign, publicity, information, brochures, and she won the argument," Mr McMillan-Scott said.

'Open to debate'

"I think the British are not winning the argument at the moment, and [French President Jacques] Chirac is making all the running," he said.

Mr McMillan-Scott held talks with Mr Blair on Friday.

The UK says it will use its veto to protect its �3bn annual refund but Mr Blair said it could be "open to debate" as part of wider reforms.

But Mr Chirac said the rebate should end and snubbed calls for reform of farm subsidies.

And German Chancellor Gerhard Schroeder said the new EU budget could not be agreed without a British compromise.

Asked whether a budget deal might be possible without a UK move on the rebate, Mr Schroeder said: "That will not be possible, given that all must make compromises."

I am not going in obstinately to say Britain has what Britain has Tony Blair Analysis: UK won't give - yet Q&A: The UK's rebate Q&A: EU Budget rows

After talks in Paris with Mr Schroeder, Mr Chirac said all nations should "make an effort" in EU budget negotiations.

He told reporters: "Each one must make an effort. Above all our British friends must recognise how things have changed and the need for greater equity in the financial charges that each country bears."

His comments came after Mr Blair said he would not move on the rebate, negotiated by Margaret Thatcher in 1984, until France and other nations agreed to cut farm subsidies.

Mr Blair told reporters in Downing Street he was not prepared to see the UK penalised again and it was not possible to discuss the rebate alone.

"If you have a fundamental review of how Europe spends its money then of course everything then is open to debate," he told reporters.

'Identity crisis'

Mr Blair, who will visit both Mr Chirac and Mr Schroeder early next week, was speaking after meeting European Parliament president Josep Borrell.

Next Thursday's European summit will discuss the fallout from the French and Dutch "No" votes on their European constitution referendums.

HAVE YOUR SAY The whole funding issue needs addressing before the rebate is given up Dave Hall, Farnborough, Hants Send us your comments How the money is spent

Mr Blair said there needed to be a fundamental debate about Europe's future to enthuse people about the EU and ensure it met people's concerns in the 21st century.

He added: "I am not going in [to the European summit] obstinately to say Britain has what Britain has and we are not discussing it with anyone."

Earlier, Chancellor Gordon Brown said those leaders challenging the UK rebate were trying to "wish away" Europe's real problems.

The UK would not negotiate away the rebate, said Mr Brown, nor would it accept a freeze on the amount the UK gets back.

Shadow cabinet minister John Redwood said Mr Blair had "risen to the bait" by his suggestion the rebate was open to negotiation.

"All Mr Blair has to do is protect our rebate, which he can do anyway because he has a veto over any removal of it.

"He has allowed it to get into play and he has now given people to believe he will negotiate it away in part," he told BBC Radio 4's Today programme.

Former Europe minister Denis MacShane said he thought there was a "double crisis in Europe".

He told Today: "Obviously the constitution is dead, has been dead.

"But we have got also to sort out the European economy because what we have is a European Budget that is dedicated to the Europe of the 1960s, maybe 70s, not the Europe of the 21st century."

He said he thought Europe should "spend less but spend better".