Tony Blair is in Brussels for what promises to be a challenging meeting with his European counterparts.

The Telegraph reports that the prime minister has given up on an economic reform project aimed at freeing up Europe's services sector.

The directive would have allowed providers of services to take up short-term offers of work in other countries without immediately having to sign up to local trading rules.

But the French, using fears of a No vote in their referendum on the EU constitution, have succeded in watering down the proposal.

EU leaders are also said to be split on lifting the arms embargo on China.

Lifting the ban, which is an initiative led by France and Germany, has been strongly criticised by the Bush administration.

The prime minister's official spokesman played down reports that Jack Straw, the foreign secretary, had reached out to EU counterparts in an attempt to delay lifting the ban.

Today EU leaders will agree plans for a revamp of the 10-year "Lisbon strategy" of economic reforms, which set the target of making Europe the world's most competitive economy by 2010.