EU leaders have ended their talks, pledging to push on with economic reform but watering down plans for liberalisation of the services sector.
Meeting in Brussels, the leaders agreed that plans to open services to EU-wide competition would be reworked.
Correspondents said the decision was a victory for French President Jacques Chirac, who is battling to win a May referendum on the EU constitution.
The leaders also agreed to relaunch the stalled Lisbon Agenda economic plan.
Although critics say it is unachievable, the plan aims to make the EU the world's most dynamic knowledge-based economy by 2010.
Plans call for an injection of investment in research and development to boost jobs and growth.
Earlier, the leaders had also signed off on changes to the stability pact governing the euro.
Strong support
Correspondents say France's opposition to service sector liberalisation was grounded in fear about the impact on jobs.
As a result, the wording of the proposed services directive will be changed and a study carried out into its possible consequences.
Supporters of the directive, including the UK, rejected French proposals to tear it up altogether and said the agreement to review it should be seen as a move to help the French government win its referendum and not an abandonment of reform attempts.
President Chirac had earlier warned that a "no" vote in France's referendum would push the EU into crisis.
Despite French criticism of the plans, the European Commission - which put forward the proposal - maintained that the services directive could boost economies and create jobs.
"The [services] directive will not be withdrawn, but amendments will be made to respond to the demands of the European social model"
A spokesman for UK Prime Minister Tony Blair, whose government supports the draft services directive, said the French changes would not throw it off course.
"Yes, people voiced concerns, but overall the Commission received a lot of support from around the table," he said.
"We're not shelving the services directive, it is continuing through the normal legislative process in which people's concerns can be debated."
The service sector shake-up is part of efforts to implement the EU's Lisbon Agenda, which was drawn up at the height of an economic boom five years ago.
It set the ambitious target of achieving 3% economic growth and the creation of 20 million jobs by 2010 - but progress since then has fallen short.
French referendum
President Chirac's opposition to the services directive comes ahead of the French referendum on the EU constitution, which is due to be held on 29 May.
The plan to reform EU services has been unpopular in France, and opinion polls have suggested that the outcome of the referendum could be close.
The concessions obtained by the French government - backed by countries including Germany and Sweden - could help its 'yes' campaign.
"The [services] directive will not be withdrawn, but amendments will be made to respond to the demands of the European social model," Luxembourg's Prime Minister Jean-Claude Juncker told a news conference.
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