EU finance ministers have expressed guarded optimism that a solution can be found to France's breach of the EU budget rules.

The issue was discussed at a meeting of ministers from euro zone member-states in Stresa, northern Italy, yesterday. Reports from the meeting said the European Commission had suggested a compromise, whereby France would avoid fines under the EU stability pact rules, provided it showed genuine efforts to get its budget deficit under control.

Afterwards, the Minister for Finance, Mr McCreevy, said he was confident of a solution but that it had to be within the rules of the Stability and Growth Pact, which governs budgetary policy in the euro zone.

The French deficit exceeds the maximum level of 3 per cent of GDP set in the pact. Under the rules, this threatened to create a crisis under which France could be subjected to censure and subsequent heavy fines. Following the meeting, the French minister, Mr Francis Mer, said he believed that the deficit would be below the limit by 2005.

Some progress appears to have been made at yesterday's meeting but all eyes will be on next month's French budget and the subsequent assessment of the position by the Commission.

"I hope we can get an agreement on this but it has to be within the rules," Mr McCreevy, who takes over the presidency of the EU council of finance ministers next January, told reporters as he left the meeting.

"They [the rules\] are in the treaty and are a legal obligation. We can't let one member-state do what they like."

However, he expressed confidence that a solution could be found and said any discussions of fines on France under the pact rules was still "a long way off".

European Monetary Affairs Commissioner, Mr Pedro Solbes, said: "On France, our views and analysis is hampered by the absence of a budget for 2004. Minister Mer has reassured us today that discussions are under way with the French government to come to a coherent and credible budget plan. But his comments have not reassured the Commission that the result will be in line with the Ecofin's recommendations of last June.

Mr Solbes said it was too early to say whether the Commission was closer to sanctions proceedings. "France has alway said they will respect the 0.5 per cent on structural \ limits. I have always said this, from our point of view, is not enough."

Mr Romano Prodi, European Commission president, said after the meeting that he believed France would produce a "road map for convergence", but some EU members are highly sceptical that Paris is serious about respecting the rules.

The German finance minister, Mr Hans Eichel, said yesterday's meeting had included "a very constructive debate" and he was confident France would make every effort to stay within the rules.

Earlier, Mr McCreevy had said the rules of the pact must be abided by, but flexibility was possibly in interpreting them.

Speaking in an interview with CNBC TV ahead of yesterday's meeting, he took a less strident position than a number of other finance ministers from smaller member-states, who called for a strict interpretation of the rules.

Yesterday's euro group meeting took place ahead of a full meeting of EU finance ministers, which continues today.

However, Mr McCreevy said "there has to be give and take on both sides, not just on one side", appearing to indicate that if France wanted leniency, it had to go some way towards meeting the demands of other euro zone members that it acts to reduce its deficit.

Some other ministers, from Austria and the Netherlands, took a tougher line ahead of the meeting. The Netherlands finance minister, Mr Gerrit Zalm, said the very Maastricht Treaty, which set up European monetary union, was at stake.