By Chris Morris BBC Europe correspondent

Under proposals from the European Commission Britain's �2bn yearly EU rebate, won by Margaret Thatcher in 1984, could be scrapped. This would nearly double the UK's contributions, making it the EU's biggest paymaster.

The British government has refused to discuss the proposals with Europe

The British budget rebate... it's part of EU folklore: Mrs Thatcher and her handbag, getting the money back in the first place... a generation of British diplomats defending the rebate through thick and thin... and now here it is again, slap bang in the middle of an almighty row.

What's it worth? - well, the figures have varied over time, but more than �2bn has been handed back to the Treasury every year for 20 years.

No wonder people are getting so hot under the collar... it's a lot of money.

Too much, says the European Commission, and most member states agree.

British officials can say it's non-negotiable until they're blue in the face, and they do have a veto.

But the pressure for reform is only just beginning.

Remember all those new member states in eastern Europe that Prime Minister Blair wants to be friends with? They'll have to help pay for the rebate, even though it'll take decades for their economies to catch up with Britain.

Richer Britain

It sounds like a rather strange concept in the first place. You pay lots of money into the EU budget, complain that it's not fair, and then get some of it back again.

But there is a reason for the rebate - other countries get far more benefit from the budget than the UK does in the form of farm subsidies or regional aid, so they get their money back in other ways.

Mrs Thatcher's government negotiated the rebate in 1984

When the rebate was first negotiated Britain itself was one of the poorest countries in the EU, and farm spending accounted for a stunning 70 per cent of the EU budget.

Since then, things have changed - the agriculture budget is still frankly enormous, but it's now less than 50 per cent of total spending and falling.

And Britain's got richer. But how much richer?

It's the second wealthiest country in the EU, says the Commission. Not so, say British officials, we're much lower down the table.

You pays your money, and you takes your choice of statistics. But no matter how rich Britain is or isn't, the government says the Commission's proposal to phase out the rebate is a non-starter.

Compromise

It would mean the UK's net contribution to the EU budget would be half as much again as that of France, a country with an economy of similar size.

Hardly a vote-winner in any future referendum on Europe.

So where do we go from here? Well we've already had plenty of muscle flexing, and the language British officials have been using to talk about the Commission's proposals hasn't exactly been diplomatic - "ludicrous", a "crude smokescreen" and so on.

We can look forward to more of that in the months to come as ministers start to address these plans. The Commission is hoping that there will be some room for financial compromise further down the track.

The only way Britain might take the current proposals seriously, though, is if the whole vexed issue of the Common Agricultural Policy and radical reform of farm subsidies is put back on the table as well. It's the CAP which eats up so much of the EU budget in the first place.

But it's hard to imagine the French - the main beneficiaries of farming largesse -agreeing to that, especially after the announcement that the French government is going to let its people vote on the EU constitution as well.

Imagine a future summit where Tony Blair tries to lean across the table and say "But Jacques, I've got a referendum on the constitution to win". Now President Chirac will be able to lean right back and say "So have I, Prime Minister, so have I".

They may find a way around it, but another big EU fight over money is on the cards.