The UK gives 10.5 billion euros (£7bn) of its budget rebate, after initially offering 8bn, while the overall budget grows to 862.3bn euros over six years.

However, the vexed question of reofrm of agricultural subsidies has been postponed until 2008/09.

Mr Blair said it was "an agreement that allows Europe to move forward".

French President Jacques Chirac, who has long been at odds with the British leader on budget issues, praised Mr Blair's movement on the UK budget rebate.

"It's important to underline the importance of the gesture, legitimate I think but politically difficult by Tony Blair, by accepting that the British rebate be deeply transformed," said Mr Chirac.

German Chancellor Angela Merkel said the deal was "a good accord for the future of Europe".

The EU leaders also agreed to grant formal candidate status to Macedonia.

The decision had been delayed by the budget impasse, with France especially sceptical about the wisdom of expansion plans for the bloc while finances reamined undecided.

Right to review

Key stumbling blocks in the negotiations have been the UK's rebate and cuts to farming subsidies.

The UK has wanted to hold on to the rebate secured by former UK Prime Minister Margaret Thatcher in 1984 while the French oppose cuts to the Common Agricultural Policy (CAP), of which it is the largest beneficiary.

The BBC's Nick Robinson in Brussels says attention has focused on a new budget review clause that allows for the possibility of a CAP review before 2013 but allows France to say that the CAP might not be changed.

This review has been scheduled for 2008/09.