The government will fail to meet a 30 June deadline for payments

Defra secretary David Miliband admitted the failure to recompense agricultural workers had "caused real distress".

He said he was prioritising a total of 14,500 unpaid claims, 12,200 of which were for more than 1,000 euros (�687).

Shadow Defra secretary Peter Ainsworth said he welcomed the "modest progress" in addressing an "appalling fiasco".

He said the backlog had led to "hardship to many in the farming community and related industries at a time of profound uncertainty and stress".

Partial payments

Overall, 120,000 farmers are affected by the new rural payments scheme, meaning one in eight has yet to receive any subsidy.

Mr Miliband said that more than 100,000 of them had been paid a total of �1.38bn by Tuesday of this week.

More than 82,000 claims had been settled in full and a further 18,000 applicants had received a partial interim payment.

But the remaining 14,500 subsidies had not been paid and after representations by farming leaders, those who did not receive the full sum by the end of this month would receive interest, he said.

I know that this year's problems have caused real distress and I repeat the apology to farmers I have made before David Miliband, Defra spokesman

The new system calculates a single annual subsidy for each farmer for looking after their land, rather than a series of payments for producing food.

The European Commission has refused to grant a request from the UK government for an extension to its deadline of 30 June for the subsidies to be paid.

The Rural Payments Agency [RPA] - which was established to distribute the money - has been struggling to recompense farmers throughout this year.

The government may now be fined tens of millions of pounds as a penalty.

Mr Ainsworth described the government's extension request as a "humiliating plea".

"Many questions remain to be answered, questions about how the problems arose in the first place and questions about what happens next," he added.

Further apology

On Wednesday, the BBC Radio 4 programme File on 4 revealed that many British farmers had used up their bank overdrafts while awaiting their subsidies and could not pay their bills as a result.

"I know that this year's problems have caused real distress and I repeat the apology to farmers I have made before," Mr Miliband told the Commons.

Priority will be given to settling unpaid claims above 1,000 euros

"I can assure the House that the RPA chief executive will be looking to take interim steps to aid the recovery process and improve the experience of farmers dealing with the agency to the maximum possible extent."

He said the interest payments would be made by the RPA at 1% above the London Interbank Offered Rate, subject to a minimum payment of �50.

Chris Huhne, the Lib Dems' Defra spokesman, described the situation as "an extremely grave issue for a continuing number of farmers".