Agency workers could be set to secure equal pay and a wide range of employment rights, reveals a leaked EU directive.

A copy of the proposals, disclosed to the FT, would see temporary works granted the same rights on pay, pensions, holiday and other benefits as other long-term employees carrying our comparable jobs.

With more than one million people working as temps in the UK, the plans have been criticised by business leaders who fear that increased red tape and costs running into billions of pounds would reduce labour market flexibility.

Digby Jones, director general of the Confederation of British Industry, has written to the European Commission chief, Romano Prodi, to warn that the directive would be "very damaging" to British businesses.

British ministers are also said to fear that the directive goes too far in the extension of new rights.

While the directive was due to be adopted by the commission before the end of this month, it may now be delayed to avoid an inter-governmental row at next month's EU summit in Barcelona.

Further moves on extending employment laws could put the commission on course to clash with the British and Italian governments, which last week joined forces to call for a radical overhaul of employment laws and regulations across Europe.

Following a meeting in Rome last Friday, Tony Blair and Silvio Berlusconi issued a joint statement calling for economic liberalisation across the EU.

Stressing the need to focus on job creation, the two leaders said the EU had fundamental labour market flaws that need to be addressed."European labour markets are characterised by structural problems. Fundamental reforms are needed if we are to tackle the challenges ahead, increase employment rates and ensure the full development of our economic potential," said the statement.

"The current regulatory framework often reflects forms of work organisation which are now obsolete. For this reason it is necessary to reinvigorate the structural reform process to ensure the efficient functioning of our labour markets and to develop more targeted labour market policies."

The current holders of the European Union's rotating presidency, Spain, have also called for the removal of structural obstacles to employment as part of the EU's plans to create 20 million new jobs in Europe by the year 2010.

British ministers are increasingly aligning themselves with Europe's centre-right and right-wing governments in an attempt to promote greater liberalisation.

And with the UK government listing the need for economic flexibility as one of its criteria for membership of the euro, ministers are keen to point to progress on EU liberalisation, believing it could help make the case for membership of the single currency.

But the chances of radical reform being agreed ahead of elections being held in both France and Germany this year are thought to be slim.