At the opening session of a two-day summit in Cologne, the leaders said the existing European defence alliance, the dormant Western European Union, would be incorporated into the EU by the end of next year.

New bodies will be set up to handle defence, including a European Union military committee.

'Step forward'

The drive to build an autonomous European defence capability has been spurred by frustrations at dependency on US air power and hesitant American leadership during the Kosovo war as well as a concern to give the EU political influence commensurate with its financial and trading power.

A spokesman for host nation Germany said European Union states outside Nato, such as Austria, Finland and Sweden would be able to take part, as would Nato nations outside the European Union, such as Norway and Turkey.

EU diplomats said they hoped neutral countries would opt out of operations without blocking them, if they felt they could not support them.

'Stop freeloading'

UK Prime Minister Tony Blair's spokesman hailed the agreement as a "big step forward" that would make the EU a major player on the world stage.

However, Conservative defence spokesman John Maples, said: "Putting control of Europe's defences directly in EU hands will risk the very future of Nato and will threaten to weaken greatly the United States commitment to Europe's defence."

The Liberal Democrats welcomed the move. Leader Paddy Ashdown said: "If Europe is going to get serious about defence then other European countries have got to stop freeloading on the US and to some extent the UK and France."

New approach

Mr Ashdown said some European countries like Germany and Italy did not punch their weight on the defence spending front and suggested a more equal distribution of responsibility.

The difficulties of Nato's campaign in Yugoslavia highlighted the need for a new approach to regional security for the EU, he said.

"History will say of Kosovo - here is an event which came before Europe was ready. We cannot afford to be unready again," he said.

The leaders also vowed to work towards closer and more efficient collaboration among Europe's fragmented defence industries, although government efforts to bring about a giant European Aerospace and Defence Company have so far failed to sway the private sector companies concerned.