Negotiators for EU governments and the European Parliament walked out without even discussing next year's spending blueprint, after 8 hours spent squabbling over a request for 9 billion euros in extra cash to fill a funding gap in 2012.
"Under these conditions, we felt that negotiations which hadn't really begun by six o'clock in the evening couldn't reasonably be expected to finish during the night," said the parliament's lead negotiator, French lawmaker Alain Lamassoure.
Sources in the meeting said the talks ultimately failed because lawmakers from the European Parliament refused to discuss the 2013 budget before an agreement on the extra funds for 2012, while governments wanted to negotiate both as a package.
Asked whether the parliament took the decision to walk out of the talks, Lamassoure said: "I would say rather that it was the ministers who didn't walk in."
Before Friday's talks, negotiators warned that failure could affect the outcome of an EU summit on November 22-23, where leaders will try to agree plans for the bloc's next long-term budget worth roughly 1 trillion euros.
"If we succeed in these negotiations now, we will create a better atmosphere for convergence and agreement in the (summit) negotiations," said Cyprus's deputy minister for EU affairs, Andreas Mavroyiannis.
"If not, I suppose this will poison a little bit the atmosphere," he told Reuters ahead of the meeting.
The failure will also delay about 670 million euros of EU aid funding to the Italian region of Emilia Romagna, which was hit by a series of powerful earthquakes earlier this year, but negotiators said there was agreement that the funds should be paid.
A fresh round of talks is expected ahead of a November 13 deadline for a deal. If the deadline is missed, the European Commission will have to draft a new budget plan in a Last-ditch bid to get an agreement before the end of the year.
The European Commission said its request for additional money this year was needed to avoid cutting off EU funds for education, infrastructure and research projects.
The request was based on government estimates of claims for EU funds that they expected to submit before the end of this year, it said. But net budget contributors including Germany, Britain and the Netherlands questioned the figures.
"We take the view that implementation of the budget in 2012 is not a basis for the claims made by the Commission," Germany's Permanent Representative to the EU Peter Tempel said.
"These extra needs mentioned by the Commission should be met above all by redeployment, and we expect the Commission to react to that point," he told EU colleagues during the meeting.
But EU Budget Commissioner Janusz Lewandowski said any unused funds in this year's budget had already been moved to fill the gap, leaving no room for further redeployments.
"What I can confirm... is that we need 9 billion," he told reporters after the meeting. "But for sure it cannot be redeployment - we are at the limit."
If no deal is reached on the 2013 budget before the end of the year, the budget for 2012 will be divided into 12 equal parts and paid monthly into the EU's coffers, leading to disarray in the bloc's spending in areas such as agriculture.
The Commission and EU lawmakers are demanding a budget of 138 billion euros in 2013, representing a way-above-inflation 6.8 percent rise compared to this year.
Most national governments want to limit any increase to 2.8 percent, and identified about 5 billion euros in cuts to proposed regional development aid and overseas spending in areas such as development assistance and trade promotion.
One major incentive for net budget contributors to limit next year's spending is the fact that if agreement on the 2014-2020 framework is delayed, the budget ceiling for 2013 will be automatically rolled over with an annual increase for inflation.