Amid few signs of compromise, Germany's Foreign minister Joschka Fischer warned that financial reforms were an "essential condition" for the the EU's planned expansion in Central and Eastern Europe.
Germany stepped up pressure on Britain's pounds 2bn annual rebate. The Chancellor, Gerhard Schroder, said: "All the options have to be considered."
He was backed by the French president, Jacques Chirac, who said there should be "no taboos", while Sweden's premier, Goran Persson, said that now the "Margaret Thatcher age was over", it was time for Britain to pay its share. But Mr Blair insisted it was "not negotiable" because the level of reform of the Common Agricultural Policy would not be enough to compensate for Britain's contribution.
Britain's rebate, worth on average pounds 2bn a year, was negotiated by Mrs Thatcher in 1984, but four countries - Germany, the Netherlands, Sweden and Austria - now argue they are in a worse predicament then Britain was in the mid-Eighties.
The Austrian presidency is pressing leaders to agree to a March deadline for the resolution of the budget question, with everything - including the British rebate - remaining on the table.
Mr Schroder has used particularly blunt language to articulate his demand for a cut in Bonn's 22bn mark (pounds 8bn) annual net EU budget contribution. This marks a decisive change for Germany, and Mr Schroder has accused his predecessor, Helmut Kohl, of being "ripped off" over Europe.
Although at odds on the issue of the British rebate, London and Bonn agree on the need to freeze EU spending at its current level, plus inflation, for the years 2000-2006.
That is fiercely opposed by big beneficiaries of structural and cohesion funds, including Spain, whose Secretary of State for European Affairs, Ramon de Miguel, said he did not recognise Germany's call for a cut in its net contribution. "It's like a 20th-century Robin Hood, but in reverse," he told reporters. "We've never recognised that there is a German problem. It's a problem the prosperous countries have to work out among themselves."
The familiar, hard-line positions of heads of government prompted claims from the President of the European Parliament, Jose Maria Gil-Robles, that Thatcherism was "emerging from the grave".
Mr Blair claimed a new consensus on the issue of tax harmonisation, and Downing Street said that his contribution on the issue had been welcomed by Jacques Chirac, the French president. However Mr Blair's contribution has been relatively non-controversial.
Mr Blair's spokesman backed the idea of a March deadline, but added: "Basic positions are being laid out, rather than this being the place where there are real, detailed negotiations."
The European Commission has estimated the cost of enlargement, which will bring up to a dozen Central and Eastern European countries into the union, will exceed $50bn.
Mr Schroder stepped up the pressure for British concessions on the controversial withholding tax on savings, arguing that moves to tackle unfair tax competition should be speeded up and resolved in the first half of next year, during Germany's presidency of the EU.
Over dinner last night, EU leaders were due to discuss a reprieve for duty free.