THE premier of the east German state of Saxony, Mr Kurt Biedenkopf, yesterday defended his decision to grant 141 million marks (£59 million) in subsidies to carmaker Volkswagen AG, sparking a major row with the European Union.

German finance minister, Mr Theo Waigel, urged the rebellious eastern state to reach a compromise with the EU and warned on German television that "poisoning the air" was not constructive.

Mr Biedenkopf told the weekly news magazine Der Spiegel that he had acted in the interests of the 23,000 employees at Volkswagen's plants in the eastern towns of Mosel and Chemnitz. "If you're in Brussels, you can't tell if some region needs five million marks to help stop unemployment," he said.

Mr Waigel said in an interview with n-tv that Saxony, the EU and German economics minister, Mr Guenter Rexrodt, should come to an agreement soon to stop the dispute worsening. He added that the German government was not prepared to assume responsibility for Saxony's actions. "This conflict is extremely serious. The outcome of all of this is going to be that we will have to notify Brussels for every subsidy we pay and that's a mistake," Mr Biedenkopf said.