By Chris Morris BBC correspondent in Brussels

The US is concerned of a threat to Nato's role

The European Union has agreed to set up a new defence agency next year to improve military co-operation and boost European military capabilities.

But plans by a group of countries led by France and Germany for much closer defence links are still the focus of disagreement.

The EU is trying to avoid unnecessary duplication in defence spending.

And the new Armaments and Research Agency, approved by EU defence ministers, is part of the grand plan.

They want it to co-ordinate purchasing and boost European defence by filling important gaps, such as the ability to deploy troops quickly and for long periods.

'Scarce resources'

But some of Europe's military ambitions have raised concern in Washington, especially a proposal from four countries - France, Germany, Belgium and Luxembourg - for a new EU headquarters for operational planning.

The US sees that as a threat to Nato's role and some of its European allies agree.

The proposal has been toned down and French officials continue to insist that it would complement, not challenge Nato.

But British Defence Secretary Geoff Hoon said it was still unacceptable.