The government says it has helped secure an "excellent deal for the UK" following its negotiations over the 2012 EU budget.
The spending plans were set at an inflation-only rise of 2% to 129bn euros (£110bn) after 15 hours of talks.
Euro-MPs and the European Commission wanted more than double the increase.
But they were defeated by governments including the UK, which insisted they would not allow EU rises while imposing national spending cuts.
Euro-MPs had demanded a 5.2% budget rise arguing EU policy spending - most of which is redistributed in the member states in grants and subsidies - can take up the slack of national budget cuts in many areas.
Last month, Europe minister David Lidington called the proposed rise in the long-term budget "astonishing" and Prime Minister David Cameron has also said hard-pressed Britons would not understand anything above an inflation-only rise in euro spending in the foreseeable future.
An 11% rise would, according to Treasury estimates, add an extra £1.4bn (164bn euros) a year between 2012 and 2020 to the UK's contributions to the EU budget.
The only concession - which the UK voted against - to the Commission and MEPs was an "amendment" to the 2011 budget to make available up to 200m euros (£170m) extra.
EU Budget Commissioner Januz Lewandowski said the agreed deal was "clearly an austerity budget" and warned Brussels may not have enough money to meet all its financial commitment to recipients of its funds next year.
'Inflation-busting proposals'
No deal on the long-term budget is likely before the end of next year, but British ministers anxious to put down an early marker of belt-tightening are now buoyed by the 2012 budget result.
Financial Secretary to the Treasury Mark Hoban, representing the UK at the negotiations, said the decision was a victory.
"We have stopped the European Commission and European Parliament's inflation-busting proposals and have delivered on the government's promise to freeze the EU budget in real terms," he said.
"Throughout this process, we have argued that, with member states facing tough decisions on spending at home, we could not afford these unrealistic demands.
"This settlement is far below the 5.2% the European Parliament wanted and the 4.9% proposed by the Commission. It is also 12bn euros (£10.3bn) less than the maximum ceiling agreed in 2005."
He added: "We will also be fighting hard with like-minded member states against unaffordable rises in the next seven-year budget."
But UKIP leader Nigel Farage said the government was "dressing a defeat up as a victory".
"Time and time again this government has promised that it will fight EU budget increases. Time and time again we are told that a reverse is victory.
"This 2.2% increase equates for Britain an increase in our contributions to Brussels of £350m (409m euros). Will Mr Cameron tell us which services he is planning to cut to make up the shortfall - will the NHS be hit, will it be education, will it be policing?"
The European Central Bank was supposed to be the world's most independent central bank, beholden to nobody.
It has a clear, unambiguous mandate to pursue price stability, and ignore everything else.
Rescuing banks, rescuing over-indebted governments, demanding painful economic reforms - these things were supposed to be for the national governments to do.
The hard-nosed economists in Frankfurt were supposed to be above politics.
Yet now, it is looking increasingly obvious that the European Central Bank will have to rescue Italy from its debt crisis if the eurozone is to survive.
And other countries - Spain, perhaps even France - could well follow.
How did we get to this point?
Voodoo child
Europe's governments have tried their best to contain the crisis without turning to the ECB for help.
When Greece went down in early 2010, Germany, France and the others clubbed together for the money to rescue it.
As Portugal and the Irish Republic looked increasingly shaky, they came up with a more worked-out solution - the European Financial Stability Facility (EFSF).
The eurozone's bailout fund has already been called on to save both countries, as well as to foot a second rescue package for Greece.
The guarantees from Berlin, Paris and the others that underpin the fund have been augmented once, to ensure that all 440bn (£342bn) euros can be lent out.
Now there is agreement to use financial voodoo to "leverage" the fund's resources to a further 1tn euros - about 3,000 euros per person in the eurozone.
But it looks like all the painful negotiations have been for nought.
Dead on arrival
The specifics of exactly how the EFSF's firepower can be increased, without asking German taxpayers to cough up more money, have thus far eluded Europe's politicians.
Europe asked China to cough up the money that Germany would not, but without success
When a begging bowl was taken to China, it failed even to collect kind words, let alone the extra cash needed.
But even if they do succeed within the rapidly shrinking window of time available, a 1tn euros fund is probably still too small.
After taking account of all the EFSF's other existing obligations, it is not even enough to cover a single year's worth of Italy's debt repayments, as BBC editor Robert Peston has pointed out.
Moreover, the bailout fund looks to have failed before it has barely even got started.
Last week, the EFSF finally got away a postponed debt issuance to raise money for the Irish bailout.
But the surprisingly high interest rate it paid - one and three-quarter percentage points more than the German government - suggested that markets are sceptical about the government guarantees behind the fund.
As the central bank, it is the gatekeeper of the eurozone's money supply. So it can simply create out of thin air the cash that is needed to rescue Italy.
If the ECB stood unambiguously behind Italy, by making an unlimited commitment to buy up the country's debts, then investors' worries about whether those debts can be repaid should evaporate.
Germany's interwar experience of hyperinflation makes price stability an emotive issue
Of course, printing money does not solve the longer-term problems that got Italy (and other southern Europeans) into their current pickle in the first place.
It does not cut Italian wages to more competitive levels. It does not make Italy's debts or overspending disappear. And it does not break the albatross-like stranglehold of vested business interests on much of the Italian economy.
But it will help. Because the longer the crisis goes on, the more that business confidence, consumer confidence and confidence in Europe's banks collapses, and therefore the more collateral damage is done to Europe's economy.
And a recession right now will make Italy's economic problems even harder to solve.
Cultural divide
So why is the ECB so reluctant to intervene?
A large part of the reason is a cultural divide in Europe that dates back to the interwar period.
To state the obvious, Germany had a very different interwar experience to the rest of Europe.
Elsewhere in Europe, the lesson learned was that sticking to a "hard money" policy - in those days the promise that your currency was backed by gold held in the central bank's vault - can push your economy into a depression.
In Germany, in contrast, the lesson was that printing money to repay an excruciating debt burden leads to hyperinflation, which in turn leads to an angry political backlash that must never be repeated.
Germany's hard money approach - a strong Deutschmark coupled with disciplined government spending - served it well during its post-War Wirtschaftswunder.
So when the euro was founded, Germany insisted on complete independence for the ECB, as well as a "stability" pact of strict limits on government borrowing - until Germany itself later broke the rules with impunity.
German explanation
The cultural divide lies behind much of Germany's reaction to the current crisis.
It explains Germany's insistence on government spending cuts for all - including itself - even though Keynesian economists say this is a sure-fire way of pushing the entire eurozone economy into a dangerous downward spiral.
It explains why Germans at the ECB opposed even the limited interventions by the central bank to buy up troubled Spanish and Italian debts - to the extent that two of the most senior Germans resigned in protest.
It explains their resistance to cutting interest rates to boost the eurozone economy, because they fear it would let the inflation genie out of the bottle.
Economists say Italy has failed to enact economic reforms that would hurt vested business interests
However, some economists argue that a higher inflation rate is actually exactly what is needed in the eurozone, in order to help Italian and other workers regain their competitive advantage against German workers.
Germans may well point out that when the euro was created over a decade ago, they were the ones whose wages were uncompetitively expensive.
They solved the problem through unpopular labour market reforms and years of stagnant wages. So why can southern Europeans not do the same now?
There are three reasons. First, Germany has a system of centralised wage negotiations unmatched by other countries, which made it much easier to negotiate with its unions what was in effect a national wage freeze.
Secondly, Germans are not homeowners. They mostly rent their properties. This means that, unlike in for example Spain, Germany has not experienced a mortgage debt-fuelled property bubble. When you have little debt, it is much easier to live with a stagnant income.
Thirdly, Germany actually benefited from the debt-fuelled boom in its southern European export markets. But in the current stagnant global economy, it is unlikely Germany - or anyone else - will return the favour and help southern Europeans export their way to recovery.
Playing chicken
Nonetheless, the Germans have a point. While the ECB's role in solving the debt crisis is necessary, it is certainly not sufficient.
The Italians must play their part by getting their finances under control, and - far more importantly - by reforming their economy to make it more competitive and less under the sway of the kind of cosy business interests embodied by their outgoing prime minister.
That leaves the ECB and Italy in a dangerous game of chicken.
It has suited Mario Draghi to take a German line on his home country
The ECB doesn't want to budge until it is clear that Italy is serious about reform.
Nor does it want to dictate to Italy what reforms it must undertake - the ECB, after all, does not do politics. That is why the International Monetary Fund has now been called in, in an advisory capacity.
But any Italian government would be crazy to push through unpopular reforms unless it is assured that the ECB will ultimately come to its rescue.
In a game of chicken, the best tactic is to convince your opponent that you are crazy enough to risk a catastrophe.
So it has suited Mario Draghi - the ECB's new Italian head - to take a "German" line on no bailouts for Italy, and let the current Italian leg of the financial crisis ensue.
He needs to convince the Italians that they must blink first.
But if the Italians prove incapable of putting together a government with the nerve to do what is required, the question is will the ECB blink first?
After Greece controversially announced it will put its latest European bail-out package to a referendum, the BBC examines how past referendums have hampered the European project.
The spending plans are paid for by national EU budget contributions
EU's troublesome referendums
Italy begins bond sale
