LONDON (Reuters) - Battling rebels baying for Britain to leave the European Union, David Cameron faces the near impossible task this week of finding an EU budget deal acceptable to mutinous party members and to exasperated fellow EU leaders.
The prime minister's threat to veto the union's long-term budget at a Brussels summit starting on Thursday appealed to the anti-EU wing of his Conservative Party, emboldened after defeating him in a parliamentary vote calling for European spending cuts.
Blocking a deal might tap into a hardening Eurosceptical mood at home, but it would not bury an issue that felled his predecessor Margaret Thatcher, fomented civil war in his party in the 1990s and helped keep it in opposition for 13 years.
A veto would anger fellow European leaders, further isolate Britain in the 27-nation bloc, its biggest trading partner, and could lead to London paying more into Brussels coffers through alternative, annual budget deals.
The negotiations have reopened decades-long divisions over Britain's often fraught EU membership, bringing talk of a possible British exit, sometimes dubbed "Brixit" or "Brexit", to the centre of political debate from the fringes.
Business leaders warned that burning bridges with Europe would damage the fragile $2.5 trillion economy and the broadly pro-European opposition Labour Party said Britain risked "sleepwalking" out of the EU.
"It would be a betrayal of our national interest," Labour leader Ed Miliband said in a speech on Monday.
In a balancing act described by several newspapers as a "mission impossible", Cameron is looking for a deal that will win support from his fractious party in parliament and avoid upsetting European trading partners at a time of weak economic growth, tax rises and public spending cuts.
"I think I have got the people of Europe on my side in arguing that we should stop picking their pockets and spending more and more money through the EU budget," Cameron said.
He has called for a freeze in real terms in EU spending from 2014 to 2020 while most of the 26 other leaders want to allow some increase, mostly to fund development projects in poorer member states in central Europe.
Labour piled pressure on Cameron last month by siding with Conservative rebels in parliament to demand a real spending cut. It has yet to say whether it would repeat a move denounced by critics as opportunistic when lawmakers vote on the outcome of the budget negotiations.
Miliband has since talked of the need for Britain - Europe's third largest economy after Germany and France - to stay in the EU.
If Cameron lurched towards the Eurosceptic camp, he could deepen rifts with his pro-European coalition partners, the Liberal Democrats. Their leader Nick Clegg has criticized Cameron's pledge to retrieve powers from Brussels as a "false promise wrapped in a Union Jack".
Cameron has wielded the veto once before. Last December, he blocked an EU treaty change to enforce stricter fiscal rules in the euro zone. All other member states except the Czech Republic bypassed his move by signing a separate treaty.
The island nation has been lukewarm towards Europe ever since joining the EU's forerunner in 1973, refusing to drop the pound for the euro and staying out of the Schengen zone of passport-free travel.
Although the EU budget accounts for just over 1 percent of EU gross domestic product, compared to national spending of between 40 and 56 percent, Britain's influential right-wing media often portray Brussels as a sinister superstate bent on taking more money and power from London.
"Secret EU plot to stitch up Britain," screamed the anti-EU Daily Express tabloid in a front page headline on Tuesday.
British voters' attitudes are hardening against Europe.
If given a say in a referendum, 56 percent of Britons would vote to leave the EU, 30 percent would choose to stay inside and the rest were unsure, according to one opinion poll published on Sunday.
The Conservatives, who oppose an in-or-out referendum, are trailing Labour in the polls before a 2015 election and face a growing threat from the small anti-EU UK Independence Party.
Cameron has pledged to protect Britain's rebate, worth about 3 billion pounds ($4.77 billion) a year, which Thatcher secured in 1984. One EU official involved in the talks said the rebate was safe and there was some flexibility in finding ways to keep a tighter control on spending that would appeal to Cameron.
"The UK is not the biggest problem... at this stage," the official said, hinting that big farming powers France and Poland were potentially bigger worries, given that so much effort has been made to find numbers that are palatable to Britain by cutting agriculture funding.
Cameron has avoided setting a target, but most officials believe Britain wants a cut of around 120-150 billion euros from the original European Commission seven-year budget proposal of 1.048 billion euros ($1.34 billion).
So far European Council President Herman Van Rompuy, who will chair the summit, has proposed about 80 billion euros in cuts, angering the French and Poles.
Germany, the EU's biggest paymaster, wants more shaved off.
"The budget cut which is on table now, the last proposal from Van Rompuy, is in our view still too high regarding total payments," German Europe minister Michael Link said after talks with Van Rompuy on Monday night. "We believe there are still cuts to be made, and we expect this to happen. We also want to modernize the contents."
The EU official said the "landing zone" for a deal could involve cutting between 80 and 120 billion euros.
In a sign of the pressure on Cameron from inside his party, London Mayor Boris Johnson, tipped as a possible future prime minister, said he should copy Thatcher's hardline stance when she said "No!, No!, No!" to Brussels increasing its powers.
"It is time for David Cameron to put on that pineapple-colored wig and powder blue suit, whirl his handbag round his head and bring it crashing to the table with the words 'no, non, nein, neen, nee, ne, ei and ochi', until they get the message," Johnson wrote.
($1 = 0.6284 British pounds)
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Additional reporting by Mohammed Abbas and Luke Baker in Brussels; Editing by Guy Faulconbridge and Paul Taylor