Tensions between the US and European delegations at the UN's climate change conference in Bali have reportedly eased today as observers predicted a compromise agreement could be reached.

The talks continued well past their scheduled close and are expected to reach into Saturday morning but hope remains that a roadmap for the negotiations for a successor to the Kyoto Protocol can be agreed.

Tempers frayed yesterday with the US and Canadian delegations at loggerheads with the EU over the inclusion of emission reduction targets in the draft agreement.

The EU had proposed targets based on the Intergovernmental Panel on Climate Change's (IPCC) recommendations that would see rich countries cut emissions by between 25 and 40 per cent on 1990 levels by 2020. But the US delegation insisted that including targets so early in negotiations that are scheduled to continue up to 2009 would prejudge the results of future talks.

Both sides exchanged barbs throughout the day, accusing the other side of blocking the negotiations.

However, today the European delegation was seen to be making conciliatory noises. German Environment Minister Sigmar Gabriel said that "the climate in the climate conference is good", adding that he believed "we will have success in the end".

UN Secretary-General Ban Ki-moon, who is to make an unscheduled return to the conference tomorrow morning, also expressed confidence that an agreement would be reached.

The delegates are now reported to be discussing a compromise agreement put forward by the Indonesian government that would remove the tough 2020 emission reduction targets proposed by the EU, but would include a guideline for future talks that world emissions should peak within 10 to 15 years and be cut well below half of 2000 levels by 2050.

It was not clear if the US, Canada, Japan and Australia would approve the new draft agreement.

Green business groups have consistently argued progress towards a global regulatory framework based on binding emission reduction targets and an expanded carbon market is essential if they are to make investments in low carbon technologies with any confidence.