Brussels: Europe`s leaders head into a crucial summit on Thursday, torn over the military campaign in Libya and facing a political crisis in Portugal that threatens fresh trouble for the euro.
Originally scheduled to finalise a long-anticipated deal to shore up the single currency, leaders of the 27-nation European Union gather for the two-day talks from 1600 GMT facing a new financial storm should troubled Portugal seek a bailout.
Portuguese Prime Minister Jose Socrates resigned on the eve of the summit after Parliament rejected his minority government`s latest austerity plan -- aimed at avoiding a multi-billion euro financial bailout such as those granted Greece and Ireland last year.
"This crisis will have very serious consequences in terms of the confidence Portugal needs to enjoy with institutions and financial markets," he said. "So from now on it is those who provoked it who will be responsible for its consequences."
Socrates is to attend the summit, due to wind up mid Friday with the bloc signing off on a lasting game-plan to defend the euro following months of turbulence caused by financial crises in Greece and Ireland.
Leaders plan to replace an emergency bailout fund in 2013 by a permanent warchest that would be underpinned by stringent budgetary discipline as well as new rules calling for greater economic policy convergence among the 17 nations sharing the euro.
Cost-cutting proposals such as those rejected by the Lisbon Parliament meanwhile are expected to draw up to 20,000 trade unionists into the street in Brussels.
But the summit also looks set for high drama over its common foreign policy due to severe splits over the international campaign against Muammar Gaddafi`s regime as well as NATO`s potential role in it.
"It`s sad to think the EU finally found a solution to the economic crisis but that faced with a foreign policy emergency it has totally lost its way," said a senior EU diplomat who asked to remain anonymous.
"Europe`s common security and foreign policy is in crisis," he added. "Europe`s practically hit rock bottom on Libya".
In a historic move, Germany broke ranks with its EU partners by abstaining on last week`s Libya resolution at the UN Security Council, while Italy and others have shown growing irritation with coalition leaders Britain and France.
France meanwhile is blocking calls from the United States and much of the West to place responsibility for the Libya campaign in the hands of the 28-member NATO alliance -- a move also countered by NATO member Turkey.
"There is some resistance among NATO member states. France has been the most intransigent," said Italian Foreign Ministry spokesman Maurizio Massari.
"Europe has divided. This isn`t anti-French. We are talking about an important mission in which Europe has to act together to be credible."
Tensions between member states were "less dramatic" and "less impassioned" however than in 2003 over Iraq, when France refused to join military action, said Andre Deletroz of the International Crisis Group.
At the summit dinner on Thursday, Prime Minister David Cameron and President Nicolas Sarkozy will outline their thinking on the campaign in Libya, while leaders from Italy and Malta are expected to ask counterparts for help in addressing a potential migrant exodus -- another divisive EU issue.
Looking to the future, the EU is to mull new guidelines for policy towards its neighbour nations of the southern Mediterranean, including more trade and aid for pro-democracy countries, and more help for civil society.
"Redistributing available EU cash to democracies in the making will give a very strong message," said the ICG`s Deletroz.
"But it will be very important for Europe to tread carefully, to listen to what is wanted, after an era of dealing with dictators and closing an eye to rights abuses."