Despite progress in recent years, the figure of 17 million unemployed people in Europe is still to high

Tony Blair

This first formal bilateral meeting between Mr Blair and the Italian leader and billionaire tycoon has led to speculation about the creation of a new alliance in the European Union.

The BBC's William Horsley says Britain and Italy appear to be consciously forming a partnership, with Spain, to push the cause of free-market economics.

Britain's Europe Minister, Peter Hain, said the old axis of France and Germany could no longer run Europe as it once did.

The right-wing Mr Berlusconi, who has met resistance at home in his efforts to deregulate the labour market and make it easier to hire and fire workers, reached agreement with Mr Blair on the need for labour reform.

"Whatever our respective different political families, I think it is important that we work together on this issue," said Mr Blair. "The old ways of working will no longer protect jobs for the future."

Strike

Mr Berlusconi announced after the three-hour meeting that the two leaders would meet again "to finalise our common position on these pressing issues" in London before next month's EU summit in Barcelona.

The final position is expected to be presented to the summit, where Mr Blair is keen to push for reforms of the union.

Forthcoming elections in France and Germany, however, are expected to hold up any radical developments until later in the year.

Mr Berlusconi himself faces a battle to convince his own people of the benefits of free-market reform.

As the two leaders met, several small trade unions were striking in protest at changes to employment laws, causing disruption to public transport in several cities.

Italy's largest labour confederation has threatened a massive strike if the planned reform goes ahead.

Business interests

Following the meeting, Mr Berlusconi, who has a huge business empire spanning television, advertising and insurance, was forced on to the defensive over the freedom of the media market in Italy.

He has been embroiled in a dispute over the potential clashes between his business and political roles and faces several bribery and corruption charges relating to his business empire.

"I would like to stress that both as far as the print and broadcasting media are concerned we assure free access," he told a news conference.

"I can assure you that if anything there has been a very strong stance against the centre-right government in the print media and broadcasting."