Budget talks between the Netherlands' minority government and its key ally have collapsed, Dutch media cited unnamed sources as saying on Saturday, adding to political tensions that could have repercussions for Europe's crisis-fighting fiscal pact.

Henk Brons, a spokesman for the Prime Minister's office, declined to comment but the office later said in a statement it was calling a press conference for later on Saturday.

The Liberal-Christian Democrat government and its ally, Geert Wilders' Freedom Party, had been in talks for several weeks, trying to reach a deal to cut about 14 billion to 16 billion euros from the annual budget.

The disagreement over the budget has threatened the stability of the minority government, raising concerns in European circles that it could either have to find a new ally to muster a parliamentary majority, or even collapse, leading to elections and putting new parties in government.

The cuts are essential if the Netherlands is to bring its budget deficit back to below the European Union's target of 3 percent of gross domestic product.

Dutch television NOS reported that the talks had broken down over the impact the budgets cuts would have on purchasing power, which Wilders was unwilling to accept.

A week ago, media had reported the two sides were on the verge of agreement. The breakdown follows a warning from ratings agency Fitch that the country was on the verge of a downgrade in its credit status due to high debt.

(Reporting by Anthony Deutsch, Thomas Escritt, and Gilbert Kreijger, Writing by Sara Webb; editing by Patrick Graham)