European Union finance ministers have drawn back from a confrontation with France over its budget deficit, which is set to breach the Stability and Growth Pact for the third year in succession next year, writes Denis Staunton, European Correspondent.

After a four-hour meeting of euro-zone finance ministers on Monday night, most ministers yesterday expressed sympathy with France in its efforts to reduce its budget deficit without damaging economic growth. France has been given an extra year to bring its deficit below 3 per cent.

The Minister for Finance, Mr McCreevy, said that there was a clear recognition that France was making efforts to bring its deficit under control.

"The French government have been addressing this issue. A lot of member-states felt the French weren't taking this as seriously as other member states thought they should, but that is no longer the case.

"I'm not saying there was ever justification for that particular view, but a lot of people had that type of opinion," he said.

France expects its budget deficit to be 3.6 per cent in 2004, compared with around 4 per cent this year.

Under euro-zone rules, Paris could be fined for breaching the budget ceiling for the third year running.

During the next two weeks, the European Commission will make recommendations to Paris about how it should get its budgetary house in order.

Finance ministers meet again in November and, although Austria and the Netherlands yesterday repeated their demands for tough action against France, most ministers believe that drastic action could push the euro-zone's second largest economy into recession.

The ministers yesterday gave a broad welcome to the Commission's proposal to boost economic growth in the EU by investing €220 billion in major European infrastructure projects. Some ministers expressed reservations, however, about part of the plan which would triple the level of EU aid for such projects.

Mr McCreevy gave the proposal a cautious welcome but said that some important details remained to be clarified.

The ministers approved an Investment Services Directive that will require banks and investment firms to make public any "normal market sized" transaction on the stock market.

Ireland, Britain and two other countries voted against the measure, which they believe will put European financial services companies at a disadvantage in competing with US firms.