The leaders ended their talks in Brussels pledging to push on with economic reform but watering down plans for liberalisation of the services sector.

The decision is being hailed as a victory for French President Jacques Chirac, who is battling to win a May referendum on the EU constitution.

The final day of a summit aimed at reviving the EU’s flagging economy was clouded by French polls indicating voters could reject the EU’s first-ever constitution in an upcoming referendum.

If the French vote downs the constitution, designed to streamline the running of the 25-nation European Union, the whole future of European integration could be thrown into doubt

German Chancellor Gerhard Schroeder reiterated his support for President Chirac, who has been alarmed by two recent opinion polls suggesting French voters could vote ‘no’ in a May 29th referendum on the constitution.

He said plans to free up Europe’s vast services sector, which generates 70 percent of output across the 25-member bloc, had to be tempered to ensure they do not lead to huge job losses in rich western European countries.

“We need open markets in the services sector,” said Chancellor Schroeder, but added “They must be built in such a way that does not produce salary dumping, or social dumping, so that order can be maintained in the jobs market,” he added.

The services directive aims to create a true single market in services, as there now is in goods, but many Europeans fear it will spell the end of long-standing social benefits and give such jobs away to low-wage regions.

The EU’s traditional spring economic summit had other good news for President Chirac and Chancellor Schroeder, when their EU colleagues approved a loosening of long-strained EU budget rules.

The reform of the Stability and Growth Pact, which enshrines the rules underpinning Europe’s single currency, will give more leeway to the two EU heavyweights to take measures to revive their ailing economies.

Another focus of the summit was the relaunching of the EU’s Lisbon Strategy, an economic reform plan launched in 2000 aimed at making the EU the world’s most competitive economy by the end of the decade.

That aim has been dropped, but the EU leaders agreed a watered-down version of the Lisbon project focused much more narrowly on boosting jobs and growth.