EU spending has to undergo "fundamental reform" if members are to secure a budget deal, Tony Blair has said.
Mr Blair complained of spending 'distortions'
The prime minister said the UK's £4bn annual rebate had to stay in place as long as "distortions" caused by the Common Agricultural Policy remained.
The UK was a "big net contributor" to the EU and should pay out amounts "more equivalent to countries the same size", he told the CBI conference in London.
EU ministers meet next month in an attempt to secure a budget deal.
'There for a reason'
Reports suggest the UK is proposing to give up parts of its rebate in return for lower overall EU spending.
BBC Europe editor Mark Mardell on Monday said the UK proposal would mean a 10% cut in the money spent on projects like roads, rail and water treatment in the 10 countries which joined the European Union last year.
He added: "Sources close to Mr Blair believe that losing some of the rebate won by Mrs Thatcher will be acceptable to the public if there is overall reform of the European Union's budget."
The last talks on the budget ended in crisis in June, when the UK refused to give up its rebate.
Mr Blair told CBI delegates: "The rebate is there for a reason. It's there because of the distortions of expenditure under the Common Agricultural Policy.
"If we didn't get a rebate on the CAP spending, we would end up losing even larger contributions than we are already."
Foreign Secretary Jack Straw said the UK was doing all it could to reach a deal that was fair to the poorer member states, to the EU as a whole and to British interests.
But negotiations were complicated because all 25 member states had to agree, he added.
European diplomats have been quoted as saying that the UK is proposing a budget for 2007-13 capped at 1.03% of EU gross national income.
The new member states have consistently urged the older states to reach agreement on the budget quickly, because delays will hinder their attempts to plan how to spend the money.
This, in turn, will affect how much of the money available to them they are able to make use of.
The UK will formally unveil its proposal at a summit on 15 and 16 December, two weeks before the end of its EU presidency.