But in a separate declaration, the ministers reaffirmed their commitment to the pact as the bedrock of "sound and sustainable budgetary policies" in the EU, and pledged to promote "equality of treatment" under the pact's rules.

The deal was pushed through in the teeth of opposition from EU Economic and Monetary Affairs commissioner Pedro Solbes, whose normal geniality deserted him as he struggled to contain his anger.

And a clutch of member states that have worked hard to remedy their own finances - Austria, the Netherlands, Finland and Spain - voted against it.

German Chancellor Gerhard Schroeder hailed the controversial deal as "a wise decision" that would allow the euro zone's biggest economies to refocus their energies on reviving growth.

But Dutch Finance Minister Gerrit Zalm, one the fiercest advocates of budgetary discipline, said: "The pact is not dead but it's in the refrigerator."

Germany and France, the euro zone's two-biggest economies, are on course to breach the 3.0 per cent ceiling for three years running next year.

But critics such as Mr Solbes say their financial problems are as much down to their past profligacy as to the current economic downturn.

Mr Solbes had pushed for the EU to launch the next step of an "excessive deficit procedure" against the "big two" that could have ultimately led to multi-billion-euro fines.

But a majority of finance ministers agreed to put the procedure "in abeyance for the time being".

They called on the pair to get their deficits under 3.0 per cent by 2005 but diluted the Commission's recommendations on the pace at which the deficits must come down, giving the countries a few billion more euros to play with.

Mr Solbes said the deal, by suspending legally enshrined deficit procedures, made a mockery of the 1997 stability pact.

He said the Commission "deeply regrets that the euro group has not followed the spirit and the rules of the treaty and the Stability and Growth Pact".

Mr Solbes repeatedly declined to rule out appealing to the European Court of Justice to uphold EU law in relation to the budget rules.

But Italian Finance Minister Giulio Tremonti, who chaired the talks, said the EU had done nothing illegal.

"We don't see anything wrong with defining this as a political agreement. At the end of the day, this was the only solution possible and therefore it is the best solution," he told a joint news conference with Mr Solbes.

"Even political decisions are legal," he added, causing the Spanish commissioner to flinch in protest.

ECB governors emerged from an emergency teleconference warning that the deficit deal "risks undermining the credibility of the institutional framework and the confidence in sound public finances of member states across the euro area".

"The de facto burial of the Stability and Growth Pact raises the risk of an earlier than expected rate hike by the ECB," Morgan Stanley economists Joachim Fels and Vincenzo Guzzo said in a research note.

But British Chancellor of the Exchequer Gordon Brown, who remains unconvinced of the merits of euro membership, said the accord showed increasing recognition of the need for a more "flexible" interpretation of the pact.

And the euro itself shrugged off the row, trading at $US1.17987 in late European trading against $US1.1767 late on Monday in New York.

But traders warned that over the longer term, the common currency would suffer if EU institutions are at each other's throats.

"While the financial markets have anticipated the demise of the stability pact for some time, the likely rifts this would cause between the European states could yet be construed as a negative for the euro," said Bhanu Baweja, currency strategist at UBS in London.

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