Prime Minister Tony Blair warned that an accord hung "in the balance" at the two-day gathering, aimed at hammering out a deal on the 25-nation EU's 2007-2013 funding blueprint.

His counterparts voiced cautious but realistic hope of brokering a deal, blocked mainly by Britain's refusal to surrender more of its long-cherished budget rebate, and French resistance to changing the EU's farm subsidy system.

"I hope we will be able to reach an agreement," said Swedish Prime Minister Goeran Persson, but added: "I'm not sure. There are still many problems to solve."

Estonian Prime Minister Andrus Ansip said the latest British compromise proposal, presented on the eve of the Brussels summit, was an improvement but was still not there. "The second proposal is better than the first one and it is a step forward in the right direction, but it is still a short step forward. This proposal is not supporting (EU) enlargement," he said.

The budget, when finally agreed, will release much needed funds to the 10 new states which joined last year, many of them relatively poor former communist countries.

Slovak Prime Minister Mikulas Dzurinda, a close political ally of Blair among the ex-communist countries which joined the EU last year, was upbeat about prospects for a deal. "This is a good basis for negotiations and a final compromise," he said.

No promise of a deal

Luxembourg's Jean-Claude Juncker, who failed to broker a budget agreement when he hosted an EU summit in June, warned that success was far from guaranteed this time. "I am neither optimistic nor pessimistic," he said. "We need an agreement, but a lot of things need to happen for that. We need to move closer to the British, and the British to us. It may happen but it may not happen," he said.

Denmark's Anders Fogh Rasmussen was more blunt. "I think we need a new proposal in which there is improvements for the new members states, and it can be financed by cuts in the British rebate," he said.

Austrian Chancellor Wolfgang Schüssel, who takes over the EU presidency from Britain next month -- and who will have to cope with the budget standoff if this week's summit fails -- said the bloc was moving slowly towards a deal. "I have the impression that we are moving, gradually, maybe slowly, but I think we are moving in the right direction. What we need now is a united Europe and not a divided Europe, and I think everybody knows it," he said.

German Chancellor Angela Merkel, attending her first EU summit since taking office, said: "We will do everything possible. (We will) try our best ... We cannot say now if we will be able to come to an agreement."

European Commission chief Jose Manuel Barroso called on EU leaders Thursday to hammer out a "credible" budget deal capable of funding the bloc's expansion into eastern Europe. "It is about coherence and credibility. Are we credible when we say that we want an enlarged Europe to work?" he said.