After arriving at the summit, Mr Blair dived straight into head-to-head talks with French President Jacques Chirac in a bid to resolve lingering differences blocking agreement on EU spending plans for 2007 to 2013.
Mr Chirac's spokesman said the president told Mr Blair that any budget deal must include a "lasting" reduction in Britain's long-cherished rebate, which comes to billions of euros a year.
Mr Blair's spokesman downplayed any sense of confrontation, saying "people do want to do a deal" and describing the talks as good. "But it is difficult," he conceded.
At stake is not just the budget deal but hopes of dragging the EU out of a series of crises this year, notably its failure to get a constitution off the ground, and with further expansion now being called into question.
Tough negotiations
"It's going to be very tough, very difficult," Blair admitted. "It's just as well to be frank about that right at the outset: it hangs very much in the balance."
The prime minister, who holds the EU presidency until the end of the month, stressed the importance of a deal for the sake of the bloc's poorer newcomers, 10 mostly eastern European nations desperate for infrastructure cash after decades of communism.
"It is about coherence and credibility," European Commission President Jose Manuel Barroso told journalists. "Are we credible when we say that we want an enlarged Europe to work?"
The main stumbling blocks are Britain's refusal to give up any more of its rebate, and France's resistance to reforming the EU's generous farm subsidy system, which accounts for more than 40 percent of spending and benefits French farmers the most.
Britain's proposed budget of 849.3 billion euros (1.02 trillion dollars) is up on a first offer last week, mainly by reinstating some development funding to new members which it had earlier planned to cut.
But it makes few changes to the rebate, negotiated in 1984 when Britain was ailing economically but which last year was more than five billion euros.
London is proposing to shave a total of eight billion euros off the rebate over the 2007-2013 period.
Its partners say that is not enough, but Mr Blair insists any further rebate reductions must go hand-in-hand with reforms on farm subsidies.
He said it was important to help new EU members bolster their economies but any budget deal would require "fundamental changes" on farm spending.
Brief talks
Mr Blair's talks with Mr Chirac lasted 15 minutes. Afterwards, both leaders met separately with new German Chancellor Angela Merkel, who is seen as a possible mediator.
"We will do everything possible" to reach a deal, she said earlier as she arrived for her first summit as German leader.
The budget pays for a vast array of program ranging from farm subsidies to economic development and infrastructure projects such as roads.
France and Poland have been leading a front against the British proposals, backed by the likes of Denmark, Italy, Latvia, Luxembourg and Spain.
"I think we need a new proposal in which there are improvements for the new member states and it can be financed by cuts in the British rebate," Danish Prime Minister Anders Fogh Rasmussen said.
It was left to Austrian Chancellor Wolfgang Schuessel, who takes on the EU presidency from January 1, to sound an upbeat tone, saying things were "moving in the right direction."
"I hope we will be able to reach an agreement," said Swedish Prime Minister Goeran Persson. "I'm not sure. There are still many problems to solve."
Unless Mr Blair is able to broker a deal, his EU presidency risks being seen, rightly or wrongly, as six wasted months, and there is speculation that he has a few more euros in his pocket to give away at the last minute.