Italy's reformist prime minister, Matteo Renzi, is to demand a relaxation of European austerity policies, challenging Germany to cut some slack for Rome and Paris, in return for agreement on who should be the next head of the European commission.

With David Cameron and Angela Merkel, the British and German leaders, locked in a worsening row over the candidacy of Jean-Claude Juncker, the former Luxembourg prime minister leading the field to head the commission, Renzi has emerged as a key figure in deciding Juncker's fate.

Before a crucial EU summit next week, Cameron appears increasingly isolated in what has become a shrill campaign to try to stop Juncker. Merkel is said by senior diplomats in Brussels to have decided against Cameron and for Juncker. London's main hopes of blocking Juncker hinge on Renzi, but the chances look slim.

On Wednesday, Renzi is to meet Herman Van Rompuy, the European council president who chairs next week's summit and who is mediating between EU national and parliamentary leaders over the incendiary Juncker question.

Van Rompuy is also drafting a policy blueprint outlining the priorities for the next five years following last month's European parliament elections, which returned a verdict of low confidence in EU leadership and against the austerity of recent years.

Italy and France, the eurozone's third and second largest economies, both heavily indebted and resistant to reforms, are seen as the main brakes on EU growth prospects. Renzi and the French president, François Hollande, both on the centre left, are demanding that they be given more time to bring down their budget deficits and that certain categories of public spending be exempted when calculating deficit levels.

"That's Renzi's condition for agreement on any [commission] candidate," said Hannes Swoboda, outgoing leader of the social democrats in the European parliament. "Van Rompuy knows he has to give Renzi an answer."

Van Rompuy is expected to include language in his policy blueprint that would allow Renzi to claim victory. In return, the Italian leader, who emerged as the big winner of the European elections, would agree to join the majority at next week's summit, which looks increasingly likely to nominate Juncker for the commission post despite Cameron's bitter opposition.

Cameron's anti-Juncker campaign has peaked over the past week and shown him to be relatively isolated. He spent two days in Sweden with the German, Dutch and Swedish leaders where Merkel rebuked him for delivering threats about a UK reaction to a Juncker appointment.

At a dinner with the 27 other EU envoys in Brussels, Ivan Rogers, the UK ambassador, delivered a broadside against Juncker, reiterating warnings that Britain could quit the EU as a result. Cameron then wrote a commentary for several European newspapers condemning Juncker as unacceptable and illegitimate, never to be supported by Britain.

In Brussels on Friday, Rogers invited journalists from the main European (non-British) newspapers for breakfast to ram home the message. The newspapers then published articles reporting that Britain was losing the battle.

"More and more it is clear that Juncker will be nominated," said Swoboda.

Diplomatic cables from Brussels to a north European capital reported on the various meetings and negotiations, concluding that Merkel has decided to push Juncker into the commission job in the autumn and that she wanted a decision next week at the latest.

The cables reported on the results of Van Rompuy's mediation, which included two conversations with Merkel and "one very difficult and long meeting" with Cameron.

Merkel, no big fan of Juncker but facing a hostile reaction at home if she abandons him, was said to be "resigned" to proposing the Luxembourger for the job.

"Her concerns are that the longer the debate goes on, the more toxic it is becoming," the diplomats reported. "She fears an outbreak of a 'UK v Germany' debate, which could get nasty. The chancellor now favours moving very promptly to appointing Juncker, and in any event, at the latest at the end of the month."

According to the cables, Merkel told Van Rompuy she had made her position quite clear to Cameron, while the prime minister contested that in conversation with Van Rompuy. The mediator was "confused" and went back to Merkel.

"The chancellor then left Van Rompuy in no doubt as to her position and said that she had been 'very clear' with PM Cameron on her planned next steps … Van Rompuy sees no alternative to the appointment of Juncker."