The EU is in "deep crisis", says its current President Jean Claude Juncker, after budget talks broke down over a bitter row between the UK and France.
The French president was scathing about the British stance
France condemned the UK for rejecting a deal to have its EU rebate frozen.
President Jacques Chirac said he "deplored" Britain's refusal to accept what he called a "reasonable" measure.
Britain argued that any deal must be linked to reform of EU farm subsidies - but France, the biggest beneficiary of those subsidies, rejected this.
One compromise offered by Luxembourg was turned down by Britain; another was described by a British official as "even worse".
Afterwards, Luxembourg's leader, Jean Claude Juncker, who currently holds the rotating EU presidency, accused some nations of lacking the political will to reach a settlement.
Diplomats and others, he said, "will tell you that Europe is not in crisis".
"It is in a deep crisis."
His comments were echoed by German Chancellor Gerhard Schroeder, who said: "We are in one of the worst political crises Europe has ever seen".
The Brussels summit also ended without any plan to save a proposed constitution rejected by French and Dutch voters in recent referendums.
'Distortion of expenditure'
Mr Chirac said Mr Blair tried to "safeguard his entire rebate, and that led other countries to overplay their hand".
"That is a bad result for Europe," he said.
Mr Blair has claimed four or five other nations - among the 25 EU members - supported his decision to reject the deal.
Asked if France and Luxembourg had sought to isolate Britain in the row, Mr Blair replied: "If it was such an attempt, it failed."
There was fighting talk from Mr Blair, says our correspondent Jonny Dymond, and it attracted the undisguised bitterness and hostility of Britain's biggest partners in the EU.
Mr Blair said the British rebate was itself the result of a "distortion of expenditure across the EU" and therefore, "if we remove the rebate, we have to remove the reasons for its existence".
He went on to attack the Common Agricultural Policy (Cap), which decides EU farm subsidies, for diverting to agriculture funds that would be better deployed on science, technology and education.
The UK is set to take over the EU presidency at the start of next month.
Britain said it will veto any cut in the 4.4bn euro (£3bn) rebate unless farm subsidies are overhauled, a stance which puts it at loggerheads with France.
French President Jacques Chirac refused to discuss any cut in farm subsidies and says the rebate should "under no circumstances be linked to a reform of farm expenditure".
The BBC's William Horsley in Brussels says the summit descended into a bitter feud about what Europe is for and who should decide its future.
Earlier, the leaders put the EU constitution on hold by abandoning a 2006 deadline for ratification, following the 'No' votes in the French and Dutch referendums on the issue.
The proposed constitution, which needs to be ratified by all 25 member states, is designed to define the future direction of the union and the way it is run.