Rory Watson examines the difficult balancing act faced by Tony Blair at the EU-US summit

THE Prime Minister will meet his closest political ally, Bill Clinton, in Downing Street this morning, all too aware that his European partners will be keeping a watchful eye on the outcome of the talks.

Mr Blair's out-and-out support for the US president's aggressive response during the Iraqi crisis earlier this year still rankles with many continentals. They believe that the Government fell down badly in its duty as current EU president.

Even though the threat of force secured the peaceful outcome everyone sought, Britain's Union colleagues argue that the Government should have done more to take them into its confidence and co-ordinate a coherent Union strategy during those tense weeks.

The close relationship which the British and American leaders clearly enjoy also disconcerts those European politicians who suspect that closer bilateral transatlantic ties are at the expense of a more committed British role in Europe.

Recent months have offered no shortage of occasions when the two leaders have helped each other, either out of domestic difficulties or to make political capital. Mr Blair's high profile visit to Washington undoubtedly boosted a president feeling the heat of sexual allegations. For his part, Mr Clinton helped clinch the Northern Ireland peace agreement and gave the Prime Minister the kudos of hosting the, ultimately abortive, Middle East peace talks in London earlier this month.

But today's meeting will focus on other issues and Mr Blair will be wearing a different hat. For several hours this morning, he will be representing the European Union's interests, not Britain's, in his meeting with President Clinton.

And while the US and the EU generally see eye to eye on most matters and the political and commercial relationship is highly valued by both, the atmosphere is being soured by a long-running dispute over three of the world's more controversial countries: Cuba, Iran, and Libya.

The US congress believes that the most effective way to improve respect for human rights and to cut down on state-sponsored terrorism by the three is to take the tough punitive line of sanctions and isolation. The Union argues a softer approach of diplomatic overtures will yield better results.

The argument would not really matter, except that the US maintains it has the extra territorial power to punish individuals and businesses from any country in the world which deal with Cuba, Iran, and Libya. Its prime targets are European companies.

The hostility of the new governments to American policy has hardened. They turned up the diplomatic pressure last week by insisting on ''secure and lasting waivers'' guaranteeing that the controversial US legislation would not be used against European firms.

''All European Union ambassadors were surprisingly tough on this when they met last week. Without these firm guarantees, there will be no deal and transatlantic friction will remain,'' warned one Brussels official.

The main responsibility for securing a deal lies with EU trade commissioner and former senior Conservative government minister Sir Leon Brittan. As late as yesterday he was still negotiating with top US officials in a bid to remove the threat of any American penalties on European firms.

But if the Prime Minister can emerge from today's meeting with just such a commitment from President Clinton, he also would share some of the credit for dealing with one of the most contentious issues in transatlantic relations.

An agreement would also deal a blow for the growing use of extra territorial legislation by the United States. In one recent four-year period alone, over 60 acts were passed authorising America to impose unilateral economic sanctions in pursuit of its foreign policy objectives.

The second major item demanding Mr Blair's attention this morning is the ambitious - some would say unrealistic - proposal to create a massive free trade area between the EU and the US. The idea of dismantling industrial tariffs on both sides of the Atlantic by 2010 and of removing technical trade barriers is a pet project of Sir Leon's.

He has long championed the concept of extending to a wider forum the principles of the Union's internal market where national barriers are relentlessly rubbed out. Almost all EU governments, as well as US administration, have been persuaded by the eloquence of Sir Leon's argument to back the scheme.

But one - France - remains totally unconvinced. Indeed, French president Jacques Chirac is as hostile to the scheme as he was to any suggestion that Dutch central banker Wim Duisenberg should be allowed to serve the full eight-year term as the first president of the new European Central Bank (ECB).

President Chirac has made

his opposition to Sir Leon's New Transatlantic Market-place scheme abundantly clear to Mr Blair on several occasions. And so, for the second time in little more than a fortnight, the Prime Minister finds himself cast in the role of mediator between France and its 14 EU partners.

A way out of the diplomatic deadlock should be easier to find this time than it was during the ECB fiasco in Brussels at the beginning of the month. Late last night EU ambassadors held an emergency session to agree on a form of words which would allow officials to explore how to put the grand trade design into practice, while at the same time reassuring France that it had not just given cart blanche to a project which it views with deep suspicion.

If Mr Blair can use his rapport with President Clinton to place both transatlantic issues on an even keel today, he will have gone a long way towards demonstrating to the EU how his special relationship with the White House can work to the benefit of both Britain and the European Union.