Updated - Prime Minister Lawrence Gonzi has started talks with EU leaders in Brussels amid proposals by the European Commission to slash the financial allocation to Malta by some €300 million over seven years.

Dr Gonzi is attending an EU summit focused on the European Union's Budget amid demands by Britain and some other countries to freeze or reduce spending.

Malta hopes to persuade other EU leaders that the island deserves more EU funding than is being proposed.

Over the last seven years Malta benefited from €855 million in EU funds and managed to lift itself out of the group of least developed countries.

The Commission originally proposed to reduce the allocation for Malta to €534 million.

Dr Gonzi arrives for the EU summit.

But as big donor countries like the UK demanded cuts to the budget to reflect austerity measures being taken at home, Malta's position deteriorated even further.

The latest figures placed on the negotiation table see Malta's funding dropping to €480 million.

"We are arguing that this is unacceptable and that our country will be the only one to move out of the first programme without entering the second. We are seeking a process of transition," Dr Gonzi said. "This means difficult negotiations."

Dr Gonzi has already held meetings with Council president Herman Van Rompuy and Commission president Manuel Jose Barroso.

Developments are expected late tonight, he said.

Dr Gonzi welcomed the fact that Malta has been officially removed from the excessive deficit procedure but said that Malta needed to continue to be given financial assistance, particularly through the EU's cohesion programme.

Malta's economic success should not be held against it, he stressed.  

"We are arguing that our country moved forward but is still behind other countries and has the potential to move even further forward... What we were given in the past seven years cannot stop all of a sudden because that would be an enormous shock for our economy."

"We are not expecting what we had before but we will keep doing our best to get the best deal for our country." 

But as the wrangling begins in Brussels, and EU leaders attending the Council summit prepare to negotiate late into the night, many are predicting that this week will end inconclusively.

British Prime Minister David Cameron, who is expected to bring the toughest stand to the summit due to increasing pressure back home, made an early appearance at the summit this morning, showing willingness to hammer out an agreement.

The UK's position has already set the tone of the summit. The European Commission's initial proposal in June 2011 to increase the overall budget from €976 billion to €1.025 trillion has already been tamed. Council president Herman Van Rompuy tabled a €950 billion proposal, €75 billion less than initially recommended.