EU leaders have agreed to finish talks by the end of the year on an ambitious plan to fight climate change.

After a two-day summit in Brussels, leaders for the 27 nations said they hoped new legislation would be enacted in early 2009.

The bloc aims to implement a 20% cut in greenhouse gases by 2020, compared with 1990 levels.

But EU leaders said they needed to look at the consequences for heavy industry and that could complicate negotiations.

The summit also discussed financial instability, as well as liberalization of the bloc's energy markets.

Some countries, like Germany and France, are worried about the international competitiveness of their businesses and the potential cost in jobs, the BBC's Nick Childs in Brussels says.

European Commission President Jose Manuel Barroso said the EU had "passed a reality test".

The Slovenian Prime Minister, Janez Jansa, whose country holds the rotating EU presidency, told reporters the EU leaders had taken "a huge step forward".

"We are convinced that the costs of these measures will be much lower than if we don't act," he said.

Green tax plan

The EU leaders also agreed to consider cutting value-added tax (VAT) on environmentally-friendly domestic products.

The proposal - put forward by Britain and France - aims to increase the use of so-called green goods.

"People have been persuaded by the arguments that we should look at this very carefully," British Prime Minister Gordon Brown said.

"If - whether it be fridges or household goods generally, or whether it be the insulation materials that make for more energy efficient homes - we can cut the rates of VAT, then I believe that will be a good thing for Europe.

"The debate has started, we have got this review happening, I believe that that is very substantial progress in only two days."

'Club Med'

The summit also gave a formal blessing for a watered-down French proposal for a Mediterranean Union.

French President Nicolas Sarkozy's aim is to forge closer ties between European countries bordering the Mediterranean and those beyond Europe, including Israel, Algeria and Tunisia.

The main objection to what some had dubbed "Club Med" was the cost, but there were also complaints that a Euro-Mediterranean partnership already existed.

In Brussels, the leaders decided to hold further regular forums with Mediterranean nations.

PHOTO CAPTION

Britain's Prime Minister Gordon Brown speaks during a press conference at the headquarters of the European Council in Brussels.

BBC