French and German leaders will hold talks before an EU summit later on Thursday over the bloc's seven-year budget, both capitals said, with Berlin adding it would be "no drama" if no deal was done.

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The office of French President François Hollande said he would meet German Chancellor Angela Merkel at 5:15 pm local time (1615 GMT) before the Brussels talks.

But a senior government source in Berlin said he did not expect Europe's power couple to go into the summit with a "formal common position."

The summit, beginning late Thursday and already slated to stretch into the weekend, promises to expose deep rifts in a European Union already mired in economic crisis.

But another government source in Berlin, who spoke on condition of anonymity, sought to play down the importance of striking a deal at these talks.

"The federal government is well prepared and is going with the purpose of contributing to a deal," this source said.

"If it turns out in the process of the talks on Thursday and Friday that it has to be a two-step process, then this is not a drama," he added.

The official said Berlin was hoping for a "realistic" ceiling on the seven-year budget, but would not be drawn on concrete figures.

But he added that the austerity being implemented across Europe should also be taken into account when negotiating how much the EU should receive from its members.

"For us it is important that the EU budget can make a contribution to budgetary consolidation," this source said."We are negotiating over an EU budget in a very unusual situation in which there is a lot of pressure on member states' budgets and this must play a role in the negotiations," he added.

The talks were likely to pit rich countries like Germany and Britain, which pay in most to the EU budget, against poorer countries mainly from the south and east, which rely heavily on European funds.

All 27 countries enjoy a veto in the negotiations and several have threatened to wield it if their demands are not met, prompting Merkel on Wednesday to raise the spectre of a new summit next year.

As Europe's biggest economy and cash cow, Germany pays most into the EU pot both in net and real terms.

And Berlin has joined a group of eight countries, led by Britain, calling for spending cuts, although this group is far from united on how deep the EU budget should be slashed.

Lined up against these countries is a group of poorer nations – net recipients of so-called cohesion funds designed to help less affluent regions of Europe catch up with the rest.

The source noted that such budget negotiations usually go down to the wire and that leaders have in fact until the beginning of 2014 to clinch a deal.

The EU was "well within the timing framework" required to get an agreement eventually, the source said.