(Recasts with Reinfeldt, Chirac comments)

By Elizabeth Pineau and Ingrid Melander

BRUSSELS, March 8 (Reuters) - European Union leaders were on the brink of agreeing on Thursday to set a binding pan-European target for renewable energy sources as part of an ambitious strategy to fight climate change.

After the first working session of a two-day summit, Swedish Prime Minister Fredrik Reinfeldt said the 27 leaders had agreed in principle to set a mandatory target for renewable sources such as wind, solar and hydro-electric power, and allocate the burden among member states later.

"We have agreed that we need a target for renewable energy supply and that it will be binding, but it will follow a discussion on what that means for each member state," Reinfeldt told reporters.

He said EU president Germany would draft a compromise including the word "binding" to be put to leaders on Friday. Irish and Spanish ministers confirmed the breakthrough but some diplomats said a handful of countries were still opposed.

The executive European Commission has proposed an EU-wide binding objective that 20 percent of energy consumption come from renewable fuels by 2020.

French President Jacques Chirac told the leaders that nuclear power must also play a role in Europe's drive to cut greenhouse gas emissions, blamed for global warming.

Speaking at his last European Union summit in Brussels, the veteran French leader said he could accept a binding renewables target for the EU as a whole, if it acknowledged nuclear energy which accounts for 70 percent of French power but is not classed as a renewable source.

"At the very least, the burden sharing on renewables must take account of the place of low-carbon energy -- nuclear and clean coal -- in our national energy choices," Chirac told fellow leaders, according to his speaking notes.

The leaders are expected to rubber-stamp an overall target to cut greenhouse gas emissions blamed for global warming by 20 percent by 2020 compared to 1990 levels, rising to 30 percent if other major polluters join in.

German Chancellor Angela Merkel, chairing the summit, said renewables and nuclear power should be kept separate, not least because renewables involve new technology which need help to become commercially viable.

Several EU states are fundamentally opposed to using nuclear power or in the process of phasing it out.

PACE-SETTER

Merkel had forecast tough negotiations but told reporters: "I reckon we can still do it, that ambitious goals will be set. Europe can only be the pace-setter on climate change and energy policy if we manage to set ourselves clear targets."

As this year's chair of the Group of Eight rich nations, she wants the EU to set the agenda on the environment.

Renewables currently account for less than 7 percent of the EU energy mix, off a voluntary goal of 12 percent by 2010.

The Czech Republic said it remained against setting a binding target for renewables but would not veto such a plan.

"(Our position) is not cast in stone in a way that we would veto a decision," Deputy Prime Minister Alexandr Vondra told Reuters in Prague.

The summit outcome will form the basis of the EU's position in international talks to find a replacement to the Kyoto Protocol, which expires in 2012, and some want the bloc to go further.

But European business is concerned it will foot the bill by losing competitiveness to dirtier but cheaper foreign rivals.

"In terms of binding obligations on renewables, nobody has the foggiest idea what the costs can be," Ernest-Antoine Seilliere, the Frenchman who presides over the BusinessEurope lobby group, told a pre-summit news conference with Merkel.

The EU leaders will endorse a plan for biofuels to make up at least 10 percent of vehicle fuels by 2020 but disagree about how to open electricity and gas markets to more competition.

The Commission proposed that big utility groups be forced to sell or separate their generation businesses and distribution grids in a process known as "ownership unbundling", but several governments have given that a cool response.

"We think that is a dangerous path to travel down if ownership unbundling can lead to European power networks being bought by those who have the money -- be it (Russia's) Gazprom, a U.S. pension fund or Chinese foreign investors," said Austrian Chancellor Alfred Gusenbauer.

Any signals from the summit will be scrutinised for moves that could affect players including Germany's E.ON <EONG.DE> and RWE <RWEG.DE> and Gaz de France <GAZ.PA> and EdF <EDF.PA>.

For a FACTBOX on the summit issues click on [nL08525169].

(additional reporting by Marcin Grajewski, Jan Strupczewski, Paul Taylor, Jeff Mason)

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