French President Jacques Chirac, who has demanded an outright end to the British budget cheque, immediately said EU leaders appeared to be heading "little by little" toward a deal on the 2007-2013 funding plans.

"Not everything is resolved but we are heading little by little towards a solution ... which would allow us to get out of this difficulty, this impasse," he said as a crunch summit headed into its final hours.

Talks on the European Union's 2007-2013 budget have been stalled due to Britain's refusal to give further ground on its long-cherished rebate, and France's resistance to reform of the bloc's disputed farm subsidy system.

A European source said that in its latest proposal Friday, Britain offered to cut an extra 2.5 billion euros off its EU rebate, from which it had already proposed slashing 8 billion euros over the seven-year period.

Budget dominates all

The new offer was presented to EU leaders on the second evening of a summit dominated by the budget wrangle. The other key problem has been French resistance to reforming the bloc's generous farm subsidy system.

Chirac voiced cautious optimism of a deal.

"I haven't got an answer at this moment to the question: will there be an agreement? The discussions are fairly positive," he told reporters, but added that the state of negotiations was "fairly positive."

Meanwhile an EU source added that Britain was proposing a total EU budget for 2007-2013 of 862.5 billion euros, increasing its previous proposal by 13.2 billion euros.

If confirmed, it would match a proposal by German Chancellor Angela Merkel, whose country has long been the EU's biggest net contributor.