Portugal has by far the highest deficit in the eurozone

Portugal, whose budgets have frequently come in for criticism from Brussels, admitted that its deficit could hit 6.8% of gross domestic product in 2005.

This is more than twice the 3% eurozone ceiling, and would represent the biggest breach so far in the rules.

And Brussels said Italy had miscounted its budget figures in 2003 and 2004.

The misleading inclusion of certain revenues brought Italy just within EU guidelines in those years; in fact, according to the Commission's statistical office, it should have been just outside.

Portuguese problem

Portugal, although smaller, is seen as more problematic, because it is the most persistent offender against budget rules.

EU finance chiefs had hoped to defuse controversy over these rules - known as the Stability and Growth Pact - when they agreed in principle to loosen its strictures in March.

That deal was chiefly to spare the blushes of Germany, by far the biggest eurozone economy, which was flirting with the 3% limit.

But the Portuguese figure, unveiled in an official finance ministry forecast, is far higher than any delinquent deficit yet encountered.

Call for reform

The Portuguese and Italian cases will give further ammunition to those calling for a more thorough relaxation of the Stability Pact.

The rules were drawn up to bolster confidence in the European single currency, which investors worried could be undermined by lavish state spending.

Since then, many governments argue that they need to ratchet up expenditure to cope with slower growth and high unemployment, and that the limits set as far back as 1997 are no longer relevant.