EU nations on Wednesday were nearing an agreement on revising the bloc`s controversial farm subsidy scheme, including raising milk quotas and reducing farm handouts, but the talks were expected to continue overnight.

European agriculture ministers began closed-door talks in the afternoon on a `health check` or mini-reform of the Common Agricultural Policy (CAP), with some tricky subjects expected to keep them at work until dawn.

As they were gathering, almost 10,000 tobacco and farm workers descended on Brussels to protest against plans to cut back their subsidies, according to organisers.

The European Commission wants to free up the system by expanding reforms made in 2003, exposing farmers more to prevailing market forces.

On the agenda were ending production limits -- through scrapping fallow land requirements and lifting milk quotas, withdrawing minimum price guarantees and above all reducing handouts for farm production in favour of aid for environmentally-friendly projects and rural development schemes.

France, the current EU president, along with other major agricultural producers including Germany, Poland and Ireland, are seeking a more prudent approach.

They want to lay the groundwork for an even bigger debate on the CAP`s total budget after 2013, when the current one ends. So far, talks on that issue have not got underway.

At the start of the year, while the world was facing soaring food prices, France stressed the need to preserve a strong CAP.

A subsequent drop in prices, in part linked to falling oil prices, has undercut that argument and complicated the task of agricultural policy reform.

However the current financial and economic crises is now concentrating minds.

`With the financial crisis, the need for governance and regulation is clear,` French farm minister Michel Barnier said in Brussels Wednesday.

He presented his EU counterparts a first compromise proposal in a bid to gain consensus.

Milk quotas are one of the main areas of dispute. The quota system is due to be scrapped in 2015 amid increasing demand, including from China and India, which has turned the infamous EU milk lakes and butter mountains of the 1980s into a historical footnote.

France, which is the EU`s biggest agricultural producer, backed an EU commission proposal for an annual one percent increase in the quotas up to 2014 so as to avoid a sudden drop in market prices.

Italy, which has been calling for the immediate abolishment of the milk quotas, was being offered the possibility for a five percent hike next year.

The EU presidency was also offering targetted aid to farmers in mountainous areas, concerned that changes to the subsidy system will hit them more than their more competitive colleagues on Europe`s plains.

Another delicate issue is planned cuts to direct agricultural subsidies, linked to production levels, particularly for large-scale farms, so as finance eco-friendly production and rural development

Brussels, which has already cut five percent of its direct aid to farmers who collect more than 5,000 euros, wants to raise this to 13 percent by 2013.

France in turn proposed to move from five percent to 11 percent in four stages up to 2010, with the biggest farms losing up to 17 percent.

However according to Brussels sources some nations, including Germany, still considered this to be going too far.