BBC Europe Correspondent Angus Roxburgh looks ahead to the summit

The UK will be spearheading a common foreign defence policy for the EU, and Mr Blair will also be keen to show that he is an enthusiastic fan of the new single currency, even though the UK will be on the sidelines when the euro is launched in 1999.

The two-day informal meeting at the resort of Poertschach am Woerthesee sees a new generation of left-leaning political leaders joining the debate.

Out goes the familiar figure of Germany's Helmut Kohl, to be replaced by social democrat Chancellor-designate Gerhard Schroeder, already known as the Tony Blair of Bonn.

Gerhard Schroeder: New kid on the block

Mr Schroeder will be joined by another new face - that of former Communist Massimo d'Alema, the new prime minister of Italy.

Earlier in the week Mr Blair told European newspapers that the UK's preparations for the euro are as advanced as many countries "inside Euroland".

He emphasised that there had been a "dramatic change of mood" in the UK's policy towards Europe since the Labour government came to power 18 months ago.

But analysts are forecasting that the UK will soon have to make more concrete commitments as Europe moves closer towards economic integration.

"There's nothing that can stop this shedding of influence from being outside the euro," said Kirsty Hughes of the IPPR think-tank. Only Britain, Sweden, Greece and Denmark will be outside the single currency upon its launch in January.

Defence figurehead

Mr Blair will also be chairing a think-tank session in which he is expected to spell out his ideas for a common foreign defence and security policy.

But the prime minister is likely to stop short of advocating a European standing army, after such suggestions have caused tension between the UK, Germany and France.

The French are reported to have complained that the UK is too close to the US and Nato to be able to map out a truly European position.

The aim will be for a new, powerful figurehead to lead an EU foreign and defence policy team to cope with crises such as Bosnia or Kosovo.

'Centre-left landscape'

Mr Blair may encounter a further problem with his desire to be at the centre of the debate as he might find that his centrist 'third way' ideas are no longer as influential as he had once hoped.

British officials are reported to have admitted that the economic ideas of Mr Schroeder's new government will be well to the left of Mr Blair and more in tune with those of France.

The instatement of Oskar Lafontaine as finance minister could reinforce a Paris-Bonn socialist partnership which would leave Mr Blair out in the cold with his free market ideas.

A spokesman for the prime minister denied on Thursday that this was the case: "There is a new landscape opening up, dominated by the centre left."

He stressed that Mr Blair and French Prime Minister Lionel Jospin were "very close" and were developing their thinking together, but added that Mr Blair and the new German chancellor "will have a lot in common".

Mr Blair is also expected to hold private talks with Irish Prime Minister Bertie Ahern in an attempt to find a way of breaking the Northern Ireland peace process deadlock over arms decommissioning.

Summit leaders will be briefed by Palestinian leader Yasser Arafat on a West Bank land-for-peace accord during a stopover on his way back from talks in the US.