The British Prime Minister, Tony Blair, has presented what he says is a final proposal in a bid to break the deadlock over the EU budget.
After long negotiations, the 25 member states are now assessing the proposal, which may see Britain giving up more of its annual rebate to help pay for the accession of ten new member states.
Earlier, Luxembourg's Prime Minister Jean Claude Juncker told reporters they were well on their way to reaching agreement.
Disagreement has centred on the British rebate and the UK's insistence on cuts in agricultural spending.
The President of the European Commission, Jose Manuel Barroso, said there would have to be compromise on all sides.
Speaking on his arrival at the summit this morning, Mr Barroso said agreement was crucial.
Britain holding bilateral talks
Britain, which holds the EU presidency, has held a series of bilateral talks with other member states.
Mr Blair had said last night that there was little room for manoeuvre.
Speaking after a dinner with other EU leaders including the Taoiseach last night, Mr Blair had said it was going to be very tough to strike a deal.
At the end of the opening day of the summit, there was a sense that all of the member states recognised the urgency of getting agreement on the new budget, but no real indication that a deal was any closer.
In principle everyone wanted agreement, but in practice every country had problems with what was on offer.
The main sticking points are Britain's rebate, a proposed reduction in aid for new member states from Eastern Europe as well as possible cuts in farm subsidies.
The summit began with the British Presidency offering a budget of €849 billion with a softening of the cuts in funding that the new member states were due to be hit by.
But the crunch issue remains the British rebate, some €5 billion the UK gets back each year, which would average on €7 billion throughout the course of the budget period.
Britain has offered to cut that by €8 billion in total. France argues it should be cut by €14 billion.
