The office of French President Jacques Chirac has announced he is to replace plans for a controversial youth employment law with proposals to help the most disadvantaged young people find work.
Prime Minister Dominique de Villepin, who has championed the job law and seen his poll ratings plunge as a result, said in a televised statement he regretted that events had shown the contract could not be applied.
He did not spell out the implications for his own political future, which has been put at risk as a result of his handling of the dispute.
"The president of the republic has decided to replace Article 8 of the equal opportunities law with measures to help disadvantaged young people find work," said a statement from the presidency.
Prime Minister Dominique de Villepin
One student leader said the First Job Contract (CPE) was effectively dead.
The new measures in the law would address the problem of youth unemployment of 22 per cent, quell the protests and find a way of saving face for Mr Villepin, commentators said.
Details of the measures were expected later in the day and new legislation could enter parliament as early as this week.
Any changes will probably include subsidising employers to hire young people with the aim of giving the worst-off access to the labour market. The most disadvantaged young people are those aged between 18 and 25 who have left school without any qualifications and who are unemployed.
Mr Chirac met Mr Villepin and other senior members of the ruling UMP party this morning in a bid to find solutions after days of intensive negotiations with union leaders and students. It was not clear whether student and union leaders pressing for the complete withdrawal of the contract would be placated.
"The necessary conditions of confidence and calm are not there, either among young people, or companies, to allow the application of the First Job Contract," Mr Villepin said in his brief televised statement after meetings with Mr Chirac and other senior ruling conservatives.
He said the contract would be replaced by proposals aimed at helping disadvantaged young job-seekers and he said he would open a discussion "without preconditions" with social partners on how to provide youth unemployment.
The protests, and a perception that Mr Villepin has been unresponsive to voter sentiment over the contract, has damaged the popularity of the prime minister and his hopes of becoming the ruling party's candidate for presidential elections in 2007.
Mr Chirac and Mr Villepin were careful in their statements to say the CPE was being "replaced". Others said it was dead.
"The players in the crisis have difficulty pronouncing the words repeal. The CPE is dead, the CPE seems to be finished . . . and I think they must have the courage finally to say it clearly," Julie Coudry, president of the student confederation, said.
The "easy hire, easy fire" law allows firms to fire workers under 26 without giving a reason during a two-year trial period, but it has proved highly unpopular.
Mr Villepin's popularity has slumped since the job contract was introduced. A poll for Liberationnewspaper showed his popularity stood at 49 per cent in the first week of January and had fallen to 25 per cent this weekend. Negative opinion of Mr Chirac rose from 56 per cent to 64 per cent over the same period.