But Austria said tumbling stock markets necessitated a cautious line on making industry pay to emit carbon dioxide, as this policy could raise costs and hand an advantage to rivals outside the bloc.

Environmentalists countered that moves to reduce Europe's consumption of fossil fuels would protect its nations from spiking energy prices, and would create millions of jobs in construction of renewable energy sources such as wind turbines.

"This is alarm level red," Luxembourg lawmaker Claude Turmes told reporters. "Lobbyists from every dirty industry are trying to profit from this crisis."

Economic cycles come and go, but climate change is a permanent threat that needs tackling immediately, European Environment Commissioner Stavros Dimas told Reuters.

"This is an important moment in the negotiations, and I am sure reason will prevail," he added.

That view was backed by British climate change minister Ed Miliband, who said: "The current economic difficulties make these issues more important, not less."

FREE POLLUTION

The European Union has ambitious plans to cut carbon dioxide emissions by a fifth by 2020, compared to 1990 levels, partly by making power generators and heavy industry pay for permits to pollute in its flagship Emission Trading Scheme (ETS).

But some eastern European states have threatened to derail the proposal, saying it puts a costly burden on their highly polluting communist-era coal-fired power stations.

Heavy industries, such as steel, aluminium and chemicals have also raised opposition, saying they will lose out to rivals in neighbouring regions that have less environmental regulation and therefore lower costs.

France sought on Thursday to diffuse that opposition, preparing a draft paper that would give sectors like steel an easier deal than EU lawmakers proposed earlier this week -- when they said heavy industry should start paying for emissions permits from 2013.

"It is very symbolic that we discuss, on the very day when stock markets across the world are in freefall,...how to treat energy-intensive industry," Austrian energy minister Martin Bartenstein said.

Unless it is protected, heavy industry will relocate from the EU to other countries, where it would continue polluting, German state secretary Peter Hintze said.

But Joris den Blanken, Greenpeace EU climate and energy director, said investment in energy-efficient technologies and clean and renewable energies would bring over a million new jobs in the energy sector alone.

"EU leaders must protect European families from the costs and insecurity of increasingly expensive fuel imports," he added. (Editing by Anthony Barker)