European Union finance ministers have defended the Stability and Growth Pact and rejected a call by the French President, Mr Jacques Chirac, for its terms to be made more flexible.

But their attempt to shore up the pact was undermined by reports that the French finance minister, Mr Francis Mer, told colleagues that his government was preparing to defy the pact by breaching the budget rules for a third year in succession.

The Austrian finance minister, Mr Karl-Heinz Grasser, said that Mr Mer told a meeting of euro-zone ministers on Monday night that France was determined to press ahead with its budget plans regardless of the effect on its budget deficit.

"He said that from his point of view in 2004 it would clearly not be below 3 per cent. If France were to go over 3 per cent for a third year, then sanctions must be the consequence," Mr Grasser said.

The Minister for Finance, Mr McCreevy, declined to confirm directly the report of Mr Mer's comments but indicated that it was accurate.

"We have rules in the Euro group that we don't say what goes on but I wouldn't be contradicting what you just said," he said.

The Economic Affairs Commissioner, Mr Pedro Solbes, denied that Mr Mer had threatened to defy the pact but he stressed that the Commission could trigger sanctions if France breached the budget rules for a third year in succession.

"Mr Mer did not say that they would exceed the 3 per cent. On the contrary, he said he would do his very best to meet the 3 per cent," he said.

The Commission is reluctant to initiate a sanctions process, which would have to be approved by EU finance ministers.

Mr McCreevy acknowledged that, with Europe's biggest economies in breach of the pact, its credibility was coming into question.

"We are in danger of getting into a situation where the Stability and Growth Pact is like the Ten Commandments.

"Everybody knows they are there, everybody says you should abide by them, and yet everybody is sinning against them. That would be a nonsensical situation," he said.

The ministers agreed to ask the commission to conduct a feasibility study into an Italian proposal to boost economic growth by investing in major European infrastructure projects.

The Italian plan envisages the projects, such as a Trans-European Network of high-speed railways, being financed by private investment and funds from the European Investment Bank (EIB).

Some ministers expressed concerns that the plan could damage the EIB's credit rating while others voiced doubts about the willingness of private investors to become involved.

Luxembourg's prime minister and finance minister, Mr Jean-Claude Juncker, complained that Italy stood to benefit disproportionately from the plan, with 30 per cent of the loans going to Italian projects.

The ministers confirmed the appointment of Mr Jean-Claude Trichet, governor of the Banque de France, as the successor to Mr Wim Duisenberg, president of the European Central Bank (ECB).

Mr Trichet will serve an eight-year term as president, starting on November 1st.

The Commission will today propose that a uniform level of VAT should be charged on most goods throughout the EU.

But Mr McCreevy insisted that Ireland would block any attempt to impose VAT on children's clothes and shoes.