The European Union?s lurch into political and financial limbo hands Britain?s Tony Blair an opportunity he will relish to shape the debate in the bloc.

But his image as Europe?s bad boy after he played hardball on the budget and entrenched euroscepticism at home could thwart the prime minister?s elusive ambition to put Britain at the heart of the EU, analysts said. Blair picks up the baton of the bloc?s six-month presidency from July trumpeting a mission to drive liberal economic reform. He is armed with an economy that is the envy of many of his continental peers and is politically stronger at home than French President Jacques Chirac and German Chancellor Gerhard Schroeder ? fierce opponents of his bid to reform the budget. He also chairs the Group of Eight nations this year and has the ear of Washington.

?Blair and the UK presidency are in a very strong position. He has just won an election and the economy is a role model for Europe?, said Greg Austin, an analyst at the centre-left Foreign Policy Centre think-tank close to Blair?s New Labour philosophy.

?The French model is so discredited. Chirac is so discredited and Schroeder is very weak. Of the more powerful economies ... he?s really the strongest of all of them.? But until the dust settles, Blair will not know the political cost in Europe of his staunch defence of London?s budget rebate at the EU summit that collapsed on Friday night.

Many leaders blame him for torpedoing a seven-year budget deal after he refused to yield any of London?s payback from EU coffers without changes to farm subsidies that largely benefit France.

Blair?s handicap

His refusal to compromise on the rebate angered new east European member states he had been keen to woo, such as Poland, and the row could leave Blair thin on allies just when he gets his moment in the sun, some analysts said.

?I think this makes it more difficult for Blair?s presidency,? said Emil Kirchner, Professor of European Studies at Essex University. ?The next six months won?t be easy. I don?t think the budget will be resolved during the UK presidency.?

Aside from the budget battle, Blair has a major handicap in trying to exercise leadership in Europe, which his eight years in office have done little to change.

There is no prospect of Britain joining the euro any time soon. London does not even sit on the EU?s main economic policy body ? the Eurogroup of finance ministers of the 12 countries that share the single currency.

And opinion polls suggest two-thirds of Britons would reject a constitution drawn up for an enlarged bloc, although Blair may be saved from ever putting it to a vote after EU leaders agreed to consign it to the deep freeze.

But Blair did succeed in his goal of putting budget reform on the table ? with the backing of Sweden and the Netherlands. London was one of five of the EU?s 25 states that opposed a final compromise proposal for the 2007-2013 budget.

The debate over the treaty also went his way. Blair shelved a referendum after France and Holland voted No on the charter.

Swedish Prime Minister Goran Persson said Blair?s position had been strengthened, calling him a ?world politician?. British Foreign Secretary Jack Straw said Europe had reached a ?turning point? and had to choose between the future and the past.

But Blair will need all his diplomatic acumen if he is to move forward on budgetary and economic reform during the UK presidency given the ferocity of the Anglo-French spat. He also faces the difficult task of starting planned accession talks with Turkey in October amid rising resistance to further enlargement.

But the prime minister may be emboldened, seeing his EU presidency and chair of the G8 as his final chance to secure a legacy to overshadow the unpopular Iraq war, analysts said.

Rebuilding the image of a reformer

If Blair can capitalise on the opportunity, he could redefine himself and even prolong his premiership, thwarting the plans of finance minister and leader-in-waiting Gordon Brown for an early handover. Or at least he could bow out on a high.

?If he can have a successful presidency where he is clearly seen to be shaping the future of Europe and the EU economy, with serious deals on climate change ... it will certainly go a long way to rebuilding his image as an active reformer,? said Daniel Keohane, an analyst at London?s Centre for European Reform, also close to New Labour thinking. ?Will he then be as keen to step down?? he asked.

Blair has said he will serve a full third term but analysts expect him out well before the next election, due in 2009-2010. He may want to hang on for elections in Germany in September and in France in 2007 that could usher in leaders who are keener on liberal economic reforms. On the other hand, a perceived failure at the EU and G8 could force him out sooner.

Before then, progress will depend on how quickly tempers cool and on whether Blair can learn to soften his own tone when talking to his EU partners about economic reform, analysts said.

Katherine BALDWIN