The European Commission has decided that London's Eurobond market - worth trillions of dollars - will be exempt from plans for a Europe-wide withholding tax on savings.

However, the proposal applies only to existing bond issues. British demands that new issues should be exempted as well were rejected.

The UK government is now studying the small print of the proposal, and consulting the bond markets.

A spokesman for UK Prime Minister Tony Blair called the new proposal "very encouraging language."

He said EU ministers would now "need detailed discussion" to work out an agreement.

But a treasury spokesman added: "The proposal needs further consideration. The issue is very complicated and the devil is in the detail."

The Commission made its move to defuse a bitterly fought, two-year row that pitted the UK government against its European partners, and that is still threatening the success of the EU's year-end summit in Helsinki this weekend.

Eurobonds are traded mainly on London's financial markets, and there had been fears that the tax plans would scare away lucrative investments worth billions of euros, and cost thousands of jobs.

Name game

The revised tax proposals were made public in a four-page letter by European Tax Commissioner Frits Bolkestein and Finnish Finance Minister Sauli Niinisto to EU finance ministers.

They suggest that Britain will not have to impose a withholding tax on interest payments or introduce an additional layer of administration.

"Instead, the UK would be able to satisfy the requirements of the directive by a simplified system of information reporting on the basis of its existing national legislation," the letter said.

A commission spokesman said the UK would only have to provide the names and addresses of savers rather than the amount of interest paid.

The letter, though, insists that the other 14 EU members "are unable to accept the [UK] proposal regarding future issues which in their opinion is tantamount to a complete exemption".

This could be the crunch point making the proposal unacceptable to the UK.

Fighting tax evasion

The withholding tax is designed to stop tax avoidance across the European Union. Thousands of savers have moved their money to accounts in London and Luxembourg, where they do not have to pay tax on interest earned.

EU governments had hoped to stop the outflow of capital - and tax payers - by 'harmonising' taxes. The plan called for a 20% tax on earnings from savings.

However, the UK and, until recently, Luxembourg had argued that the tax plans would harm their financial industries.

UK Chancellor Gordon Brown had threatened to use his veto to block the withholding tax as long as the bond market was not protected.

Fourteen of the 15 EU countries had agreed recently that interest income earned from international bonds should be included within the tax scheme, but the UK government argued this would burden the financial markets with extra costs and drive business outside the EU.