Germany pours cold water on Sarkozy union

· Merkel opposes alliance with Maghreb and Israel
· Scheme pared back after 10 days of argument

President Nicolas Sarkozy was last night forced to back away from an ambitious scheme to launch a French-led "Mediterranean Union" linking the EU's southern states in a political club with the Maghreb, Turkey and Middle Eastern countries including Israel.

Sarkozy had planned to launch the bold new union when France took over the presidency of the EU in July, but climbed down after fierce opposition from Angela Merkel, the German chancellor.

At an EU summit in Brussels last night, Sarkozy and Merkel jointly proposed a much looser grouping, to be initiated at a summit of EU and Mediterranean countries in Paris in July.

Worried that the Sarkozy scheme would split the EU while leaving the wealthier countries of Germany and Scandinavia footing the bill for an exercise in French aggrandisement, Merkel was said to have threatened to boycott the Paris summit unless Sarkozy scaled back his plans.

"She was very firm," said EU diplomats. "They had quite a fight about this."

German sources described the compromise last night as a facesaving deal for Sarkozy which gutted the scheme of much of its substance. The new organisation would still be called a Mediterranean Union, but bore faint resemblance to the original French blueprint.

The collision over Sarkozy's project was the latest in a series of clashes between Europe's two key leaders. Diplomats say the fundamental problem is one of personal chemistry, with Merkel's self-effacing sobriety jarring with Sarkozy's attention-seeking theatricality.

The Mediterranean Union was conceived by Sarkozy's adviser Henri Guaino, who hoped it would put France in a dominating position in the Mediterranean while restoring Paris's European leadership credentials. It would have linked the southern countries of the EU with 11 countries in north Africa and the Middle East. Sarkozy called for "a political, economic, and cultural union of which our children would be proud" in a speech in Tangiers last year.

Britain also opposed the plan, suspecting it was designed to wreck any chance of Turkey joining the EU. Britain is Turkey's biggest supporter in the EU, while Sarkozy is outspokenly opposed to Ankara joining.

Merkel warned Sarkozy that his idea would have divided the EU into traditional spheres of influence. Last night's deal was preceded by 10 days of difficult negotiations between Paris and Berlin. The result is that all 27 EU countries will be "equally" involved in the "Club Med" association and that Sarkozy has scrapped planning for a summit of Mediterranean countries in Paris in July.

While backtracking, however, Sarkozy has succeeded in pushing the Mediterranean issue up the EU agenda and establishing new structures and positions to bolster his ideas, diplomats said. There are to be Mediterranean summits every two years, and two co-presidents of the new union.