The BBC's Robin Oakley reports on "a practical and amicable meeting"

The signing took place on board the British destroyer, HMS Birmingham, on the second day of the St Malo summit.

The UK Defence Secretary, George Robertson, said the co-operation between Britain and France would be illustrated when their forces teamed up to monitor events in the former Yugoslavia.

The UK Prime Minister, Tony Blair, French President, Jacques Chirac and prime minister Lionel Jospin have appeared at a joint news conference.

George Robertson: "It's not just words"

Mr Blair hailed the new Anglo-French agreement on defence co-operation as a "significant step forward".

He is now with his French counterpart for further talks.

Tax row

During a 90-minute meeting in St Malo on Thursday, Mr Blair also discussed the controversial topic of tax levels within the EU with the French President.

Robin Oakley: Tony Blair is determined to protect the British budget rebate

Downing Street is keen to highlight the defence initiatives as the main thrust of the summit to distract attention away from continued pressure to harmonise tax across Europe, which Britain opposes.

The German Chancellor Gerhard Schroder has made it known that he supports his left-wing finance minister Oskar Lafontaine for an end to the national veto on tax rates.

The two leaders also talked about Europe's future budget arrangement, with Mr Chirac apparently indicating that Britain may have to consider compromising on the rebate it gets back each year on the money it pays into EU coffers.

Mr Blair told him: "I hear very well what you are saying."

Mr Chirac said of the talks: "To me this is a positive sign for the future, not only for the future for Britain and France, but more widely for the whole of Europe."

However, on relations within the European Union he warned that "the trials of the next year ... will present us with serious difficulties".

The UK government has made clear it will not surrender the rebate which was secured by the then Prime Minister Margaret Thatcher.

Warship signing

Mr Robertson and his French counterpart Alain Richard signed the defence agreement on board HMS Birmingham, which is normally based in Portsmouth but has come to St Malo for the summit.

Roberston: "A significant day for both countries"

Mr Robertson siad: "We are starting a new era of British-French military relations."

He said the document built on existing cooperation between the two countries in the military field, and would establish principles which may mean less reliance on the US in military matters.

The deal puts in place links which will allow France and Britain to better plan and execute a combined response to crises in areas of mutual interest.

A letter of intent signals a move towards the sharing of intelligence, joint planning and transport, even joint media handling.

It will not stop co-operation with other countries, or mean both nations must work together, but it is an example of the practical defence co-operation both sides believe is needed within Europe.

Closer co-operation reflects both countries' frustration at Europe's failure to develop strong joint policies in crisis areas such as Kosovo.

Mr Robertson highlighted British and French participation in the French-led European force which assembles in Macedonia later this month and will be on stand-by to rescue the international monitors of the peace agreement in Kosovo if they find themselves in danger.

Mr Robertson said: "In the next few weeks British and French troops will be in a force that is sent to Macedonia and will illustrate what we can do in leading a variety of European nations in the extraction force to be based in Skopje."