The BBC's Robin Oakley: Mr Blair and President Chirac accentuated the positive

The Anglo-French summit in St Malo decided that the European Union "must have the capacity for autonomous action, backed up by credible military forces, the means to decide to use them - and a readiness to do so in order to respond to international crises".

Robin Oakley reports from St Malo on the Anglo-French summit

UK Prime Minister Tony Blair described it as "a significant step forward", in the debate he had sought to promote earlier this year on giving Europe a stronger defence identity.

A joint declaration stated that "Europe needs strengthened armed forces that can react rapidly to the new risks and which are supported by a strong and competitive European defence industry and technology."

The aim is to be able to act independently of the US in military affairs.

Mr Robertson: "A significant day for both countries"

It was "an historic agreement", Mr Blair said. "It is fully in conformity with our arrangements and obligations under Nato and the strong relations we have with the US."

Letter of intent

On Friday, the UK's Defence Secretary George Robertson and his French counterpart Alain Richard boarded the destroyer HMS Birmingham to sign a letter of intent designed to improve co-operation on crisis management and military operations.

George Robertson: "It's not just words"

Mr Robertson said the occasion marked the start of "a new era of British-French military relations".

He said the document would establish principles which may mean less reliance on the US in military matters.

Closer co-operation reflects both countries' frustration at Europe's failure to develop strong joint policies in crisis areas such as Kosovo.

The BBC's Hugh Schofield: Concrete defence proposals will be ready for Nato's April summit

There were also a series of agreements in the fields of foreign affairs, transport, the millennium bug and helping small businesses.

But at the end of the Anglo-French summit on Friday evening, the two countries' leaders clashed over the future of Britain's annual �2.6bn annual refund from Europe.

French President Jacques Chirac and Prime Minister Lionel Jospin said everything must be on the table if forthcoming EU negotiations on economic affairs were not to be "doomed to failure".

But Mr Blair made clear he was standing firm and that the rebate was not up for negotiation.

Britain first won a rebate on its EU payments in 1984 after the then Prime Minister Margaret Thatcher insisted that Britain was paying far too much into the EU budget.

Britain was one of the biggest net contributors while being one of the poorest member states.

Mr Blair told a news conference at the end of the summit: "We stand by the British rebate."

The disagreement clouded a summit which both sides agreed had otherwise been a success.

Harmonising taxes

Mr Jospin said the controversial issue of European tax harmonisation had been raised in his talks with Mr Blair on Friday.

German Chancellor Gerhard Schroder has made it known that he supports his left-wing finance minister Oskar Lafontaine for an end to the national veto on tax rates.

Mr Jospin insisted: "Neither France nor Britain have any thought about uniform taxes. Harmonisation does not mean uniform tax.

"Nobody wants someone else to choose for his country corporation tax or income tax."

What was under discussion, he said, was tackling the problem of tax havens and "tax dumping" where one country suffers through having much higher taxes than a competitor.

The British and French prime ministers agreed to fight plans to scrap duty-free and they hoped to raise the matter at the EU Council meeting in Vienna later this month.