Prime Minister David Cameron had refused to pay the top-up, warning that it could push Britain towards the EU exit in a referendum that he has promised to hold in 2017, so long as he wins in a general election next May.
After tense talks in Brussels, finance minister George Osborne said the bill had been "halved", and that instead of a December 1 cut-off, Britain would now pay the rest in two instalments before September 2015.
"Instead of footing the bill, we have halved the bill, we have delayed the bill, we will pay no interest on the bill," Osborne told reporters.
"This is far beyond what anyone expected us to achieve, and it's a result for Britain."
The bill infuriated Cameron after he said he was ambushed with it at a European summit in October, and he quickly used today's deal to defend himself against growing pressure from the eurosceptic UK Independence Party.
The original bill was based on a recalculation of EU nations' budgets dating back more than a decade, and Cameron had refused to pay either the full amount or meet the December deadline.
Osborne said Britain would only pay half the original bill, giving Brussels a total of 850 million pounds in two instalments in July and September next year.
The rest would be offset against a full upfront payment of the 3 billion pounds annual rebate negotiated by British premier Margaret Thatcher in the 1980s, he said.
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