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By Andreas Rinke and Luke Baker
BRUSSELS (Reuters) - Prospects of a deal on the European Union's long-term budget dimmed on Friday after a fresh compromise proposal offered concessions to France and Poland but ignored British and German demands for deeper overall spending cuts.
European Council President Herman Van Rompuy, chairing a summit of EU leaders to decide on a 2014-2020 budget worth about 1 trillion euros, bowed to pressure from French President Francois Hollande and his Polish counterpart to scale back proposed cuts to farm subsidies and regional development funds.
British and German officials said that made a budget deal this week more remote.
France and Poland respectively are the top recipients of EU Common Agricultural Policy (CAP) subsidies and regional aid money, known in EU jargon as cohesion funds. Jointly, the two spending programmes consume more than two-thirds of the bloc's annual 130 billion euro outlay.
Van Rompuy's latest proposal made no further reduction in the overall budget size, according to a document seen by Reuters.
German Chancellor Angela Merkel told reporters after a first day of mostly one-on-one meetings that positions were still far apart and a deal this week seemed unlikely.
"I believe that we will move forward a little tomorrow but I have my doubts that we will achieve a result," she said. "There is a high likelihood of a second stage."
A British official said it was clear there was a long way to go before leaders agreed on "the right EU budget deal".
The compromise restored about 8 billion euros out of 25 billion earlier cut from farm spending, and more than 10 billion euros out of 25 cut from cohesion funds, while keeping the total reduction from original European Commission blueprint at about 80 billion euros.
Hollande said there had been progress, but it was not yet satisfactory and France wanted more farm payments restored.
To maintain the overall level of cuts, the proposal included deeper reductions to EU funds for research, overseas spending and cross-border telecommunications and energy infrastructure.
Germany wants further cuts of about 30 billion euros, while Britain, Sweden and the Netherlands are seeking an additional reduction of between 50 and 75 billion, officials said.
British demands for cuts to the pay and perks of EU officials - regarded by some as overly generous compared with national civil servants - were ignored in the compromise.
In a private meeting with Van Rompuy earlier on Thursday, Cameron outlined measures he said would cut some 6 billion euros from the bloc's administration bill, including raising the retirement age for most EU bureaucrats from 63 at present to 68.
After briefly outlining his latest plan to the leaders, Van Rompuy suspended the talks shortly after midnight until noon (1100 GMT) on Friday.
The negotiations could last into Saturday or Sunday if there is a chance of a deal, and several leaders have cleared their weekend schedules to allow for extended horse-trading.
Failure to strike a deal would add to the impression that EU leaders are unable to take decisive action when needed, after endless rounds of wrangling to resolve the euro zone's long-running debt crisis over the past three years. It would further damage the EU's image with its 500 million citizens.
The depth of Europe's debt crisis has made the perennial arguments over farm subsidies and rebates all the more bitter, with negotiators now contemplating the first ever real terms decline in future EU spending.
Gone are any hopes poorer EU states may have had of an increase in funds to cement the bloc's eastward expansion over the last decade. Calls to refocus limited EU resources on new growth-oriented areas have been largely ignored as countries scramble to defend traditional spending areas.
The current budget framework was agreed in 2005 in the midst of a credit-fuelled economic boom, and set a maximum limit of 1.034 trillion euros on EU financial commitments for the period 2007-2013 - equivalent to about 1 percent of EU output.
The Commission initially demanded a roughly 5 percent increase in spending for 2014-2020, equal to 1.091 trillion euros. But this has already been reduced to 1.01 trillion euros under Van Rompuy's compromise, and is expected to dip below the trillion euro mark in the final reckoning.
One issue negotiators fear could derail the talks is toxic debate surrounding Britain's budget rebate, worth 3.5 billion euros last year. Margaret Thatcher won the annual refund in 1984 to reflect the lower share of farm subsidies received by Britain compared with France, Italy and others.
EU officials accept that Cameron cannot win the support of Britain's euro-sceptic parliament for any deal that scraps the rebate, and even a proposal to reduce its value may have to be abandoned to win Britain's backing at the summit, at the risk of further alienating other countries.
Cameron has threatened to veto a deal unless it is good for British taxpayers. But another veto, less than a year after he blocked a treaty change to allow stricter fiscal discipline in the euro zone, would further isolate Britain in Europe and could increase pressure for it to leave the EU.
"Many countries are asking themselves what the hell is happening with Britain? Is it on its way out? In which case, why should we make major concessions?" said one EU official at the summit, speaking on condition of anonymity. (Additional reporting by John O'Donnell, Justyna Pawlak, Robin Emmott, Robert-Jan Bartunek, Catherine Bremer and Andreas Rinke; Writing by Charlie Dunmore; Editing by Paul Taylor and Luke Baker)