The summit is focused on relaunching the Lisbon Agenda, launched five years ago in the heat of the dot-com boom with the lofty aim of making Europe the world's most competitive economy by 2010.

"We want to redynamise the Lisbon strategy to focus on growth and competitiveness ... to end the economic slowdown," said Luxembourg Prime Minister Jean-Claude Juncker, whose country holds the rotating EU presidency.

But, on Tuesday EU ministers instead rolled back the ambitious plans, caving in to pressure to water down the particularly controversial plan to liberalize the services sector that would throw open businessess to cross-border competition.

The services deregulation plan, the so called Bolkestein directive, would have dismantled service sector trade barriers and opened up the EU member's markets to service industries such as construction and computers. It was intended to create hundreds of thousands of jobs and increase lagging economic growth rates by 2010.

But French and German leaders fiercely opposed the draft in its original form saying that it would spur an influx of cheap foreign workers from the new eastern EU countries such as Poland. Labor costs are about one-fifth in the east. Both countries have unemployment rates topping 10 percent.

In France, fears over the effects of the services directive have led to a surge in support for opponents of the EU's first ever constitution which French voters will decide on in a referendum May 29.

It is widely accepted that if France votes to reject the constitution, it would be a devastating blow to the entire EU project - the constitution, which strengthens the organs of the EU, must be passed by each of the EU's 25 members.

Unacceptable, they say

Unions and local politicians have howled over the initiative, saying it will threaten wages, employment consumer rights and environmental standards because the original version of the plan would have allowed companies to provide services throughout the EU while operating under the laws of their own country.

On Saturday more than 50,000 demonstrators marched in Brussels Saturday against the proposed EU directive to open up public service markets, which unions say will drive down social and labor standards and threaten jobs. Opponents fear the directive will lead to "social dumping" -companies and jobs either relocating to the low-cost economies of eastern Europe, or service companies from eastern Europe flooding into the west.

EU leaders -- knowing they have to reform a sector that accounts for 70 percent of the EU economy -- have sent the draft plan back to the European Commission for revision.

"We need to open up the Services Market," said EU Commission President José Manuel Barroso. "But we need to do it while fully respecting the European Social Model."

Stability pact undermined

Meanwhile, the EU approved a proposal to loosen fiscal rules in the Stability and Growth Pact -- originally created to support the euro -- and let national budget deficits creep up over 3 percent of gross domestic product under particular circumstances without punishment. The new rules will let the biggest violators, France and Germany off the hook and allows Germany to deduct reunification costs from its deficit tally.

Germany, who originally authored the rules, has violated them three years in a row. About half the EU member states exceeded the 3 percent rule.

EU wants to meet Wolfowitz

Meanwhile, EU finance ministers agreed Tuesday
that US nominee for World Bank chief Paul Wolfowitz -- a key architect of the US-led war in Iraq -- is a "serious candidate," but said they want to hear his views in person, possibly in the next 10 days.

"I didn't see any very negative attitudes about him, so I think he is taken as a serious candidate by everybody," Dutch Finance Minister Gerrit Zalm told reporters.

Austria's Karl-Heinz Grasser, asked if Wolfowitz could present his views to the next meeting of EU finance ministers scheduled for April 11-12, said that would be too late. "We need to hear from him on a European level before then. We
need to know his basic position on the (UN) millennium development goals, and his view of how he would lead the World Bank," he said.

German Finance Minister Hans Eichel -- whose boss Chancellor Gerhard Schröder has already given the thumbs-up to the deputy US defense secretary -- said that nevertheless more talks were needed. "He's a high level candidate, but there needs to be more discussions before his election," he said.