Germany said on Tuesday it could back "very limited" use of reduced value added tax (VAT) rates in the European Union, in a move that could pave the way for a deal in the bloc and cheer French restaurant owners.

In December, European Union leaders deferred until March a decision on whether to prolong reduced rates of sales tax on local services, amid reluctance from Germany in particular.

At a meeting of EU finance ministers in Brussels, Germany's Peer Steinbrueck said the country was prepared to consider allowing VAT rates only in a "very limited" number of sectors as was foreseen at the December summit of EU leaders.

"And I mean that very seriously," Steinbrueck said.

The European Commission has proposed extending the system, which allows 18 EU states to levy VAT rates below the 15 percent standard level, on services from bicycle and home repairs to haircuts. It is due to expire in 2010.

France has long campaigned to be allowed to levy reduced VAT on restaurant meals but has been thwarted by Germany's veto.

French Finance Minister Christine Lagarde said she met with Steinbrueck and that this had led to "a common position on reduced rates of VAT, in particular in the labour intensive sector... including the restaurant sector."

"I think we have the basis of a solid agreement with our German partners," Lagarde told reporters.

"There is more discussion and impact assessments but I think we have made progress," she added.

Steinbrueck said no formal agreement had been reached but that he understood the pressure the French government was facing on the issue and that a deal was "certainly possible".

"Nothing is ruled out," he said. "I can underline that Germany is ready to compromise on this matter."

The finance minister said Germany would not be making use of the option, noting it would cost him "billions."

EU finance ministers want to reach an agreement on extending the measure by end-March. However it needs unanimity among the 27 member states to be adopted as in all EU tax matters.

Germany had for months set itself against the proposal, though Chancellor Angela Merkel stopped short of rejecting it outright at the December summit.