Negotiations over next year's European Union budget have collapsed after a dispute between member states and the European Commission over a shortfall in the 2012 budget.

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Alain Lamassoure, lead negotiator for the European parliament, says the European Commission must come up with a new proposal before talks can continue. (Regis Duvignau/Reuters )

The talks, which essentially ended before they began, could be a sign of trouble ahead for longer-term EU budget issues.

At issue was a € 8.9 billion ($11.3 billion US) shortfall for 2012, according to the European Commission, which asked the states to cover the sum. Several states imposing spending cuts at home questioned the amount.

In a statement on his website, European Parliament lead negotiator Alain Lamassoure said the commission must submit a new proposal before talks, which face a Tuesday deadline, could continue.

The only agreement Friday was for  € 670 million in aid to Italian earthquake victims — but not how to fund it.

Earlier in the week, EU officials warned Europe's economy is still reeling and unemployment could remain high for years in spite of the progress made in solving the debt crisis.

The European Commission, the executive arm of the 27-country EU, on Wednesday revised its eurozone growth forecast for the economy of the entire region, saying that it now expected gross domestic product to contract by 0.3 per cent on an annual basis this year, rather than remaining flat as it predicted in the spring.

It also said that the 17 countries that use the euro will contract, with GDP falling 0.4 per cent, against a previous expectation of a 0.3 per cent fall.