Britain's EU rebate faces £3billion cap

Britain's £3 billion-a-year EU rebate faces being capped for the first time under a new deal to slash Brussels spending, it emerged today.

The plan would allow Tony Blair to claim he has defended the rebate won by Margaret Thatcher 21 years ago.

But the Tories are sure to seize on the move, claiming the proposal would hit the UK hard because the rebate is projected to increase.

Under the compromise plan, the British rebate would be frozen to stop it rising towards a projected £5 billion a year.

Any serious changes to the rebate would be exploited by the "No" campaign in any referendum on the EU constitution.

Downing Street was struggling again today to clarify whether a British referendum would actually go ahead should other countries reject the new treaty.

No10 insisted there was a "firm intention" to press ahead with a vote even if France voted "No" at the end of this month.

But Foreign Secretary Jack Straw suggested that the referendum could be ditched if the treaty was scuppered by other countries.

Mr Straw spoke just minutes after new Europe minister Douglas Alexander suggested the referendum would take place anyway.

Mr Straw said: "It would be a problem if France voted 'No'. But meanwhile unless and until the European Council makes a decision to change the obligations [to ratify a treaty], the obligations are there."

In a later TV interview, the Prime Minister said: "If there is still a constitution there has got to be a referendum on it. If what was to happen was France was to say 'no' and then the rest of Europe were to tear up the constitution and say 'we're forgetting about it' - you wouldn't have a [ referendum] on nothing."

Mr Blair has repeatedly stressed that he will use Britain's veto to protect the rebate, but he has left open the issue of what size it should be.

The matter has been a festering sore within Brussels for years, with countries such as France, Italy and Spain claiming it is unjustified.

The deal to limit the payments has been hatched by Luxembourg, which currently holds the presidency of the EU. A Luxembourg official told the Financial Times today: "We have to break the dynamic of the British rebate. If we don't, we will have real problems with the two or three countries that pay for it most."

EU diplomats are trying to get a deal together in time for a summit in June. Any deal after then is highly unlikely as Britain takes over the presidency for the last six months of this year.

Under the deal, around £20 billion would be cut from the European Commission's spending plans and £15 billion from the regional aid budget.

The contributions of big net contributors such as Germany, the Netherlands and Sweden would be limited.