UPDATE 1-EU close to deal on 2011 budget - sources

Wed Dec 8, 2010 11:53am EST

* Row threatened financial planning, undermined credibility

* EU govts said to meet some of parliament's demands

* One divisive issue may be removed from Dec summit's agenda

(Updates with details, background)

By Marcin Grajewski

BRUSSELS, Dec 8 (Reuters) - European Union governments and the European Parliament are close to breaking a deadlock over the EU's 2011 budget, which would end a row that threatened to cloud the bloc's mid-December summit, EU sources said.

An EU diplomat said the EU's 27 governments had decided on Wednesday to meet some of the European Parliament's demands, which have so far blocked the deal. Another source said the parliament's initial reaction to the offer was positive.

The stand-off over next year's budget had threatened to throw the bloc's financial planning into disarray and further undermine the EU's credibility at a time when it is scrambling to control a debt crisis across the euro zone.

"We are very close to a deal," one of the sources close to the negotiations said.

The source said government and parliamentary negotiators may meet on Monday to finalise a deal and the lawmakers could pass the budget on Dec. 15, a day before EU leaders meet in Brussels to discuss a permanent mechanism for handling debt crises.

Without a budget deal, next year's spending would be the same as in 2010, disbursed in 12 equal instalments. Some programmes would be denied funding, such as the EU's fledgling diplomatic service, a nuclear fusion project and newly created bodies to supervise financial markets.

The negotiations have stalled over the parliament's demand for a declaration that would clarify its future role in budget-making under the Lisbon treaty, a new framework for running the EU that came into force last year.

The two sides had already agreed that the 2011 budget will grow by 2.9 percent from this year's 123 billion euros ($163 billion). The lawmakers had initially demanded a 6.2 percent increase.

The parliament, which has increased powers since the EU adopted the Lisbon treaty, wants more flexibility in the way the budget is spent and guarantees that lawmakers will be represented during negotiations on the EU's next, long-term budget, which could be worth 1 trillion euros.

They also asked for a debate on giving the EU an independent source of income.

Another EU diplomat said the governments' offer to the parliament does not contain any binding guarantees. "I would see it as giving to the parliament something face-saving," he said. (Reporting by Marcin Grajewski; Editing by Ruth Pitchford)

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