Informing supervisor for declining Research fellowship position in light of PhD offer I finished my Master's in July last year and since then I have been applying for a PhD position. Due to some personal family related reasons, this search was largely non targeted for most of this year. In September I was accepted for a 1yr research fellowship post.

Being from outside of Europe naturally I had to apply for visa and after completing all documentation related formalities, I applied in late November and expect the visa to arrive soon. With my supervisor, It was agreed that it is OK to start in January.

Before applying for visa I had in a last attempt applied for a PhD position in another University in Europe. Surprisingly, I received a call for an Interview in December first week, after I had already applied for the visa. After almost an hour of fruitful discussion on the topic and my interests, the professor told me that they will decide this week. Yesterday, I received the communication that I have been accepted in the fully funded PhD program and can start in April.

Herein lies my dilemma, My supervisor for the fellowship and myself have put in continuous efforts for my arrival and now that I have been accepted for a 4yr PhD program it does not make a sense to go for the fellowship without any confirmation of continuity in the same lab post 1yr. I want to be respectful to them and prevent any unnecessary misunderstanding.

Could you advise me as to how to respectfully decline for the position and subsequently provide an option for starting in the lab before beginning at the other university if they agree (I know this is not the ideal scenario but this is the most I can offer from my position).

If there is any other recourse for this situation, I am open for same.

TL;DR: Got a 1yr research fellowship, all set to join in January. Received offer for funded PhD from another Uni. Need help for respectful decline without burning bridges.
Could the PhD position wait for a later starting date? Would the internship be open to a shorter period? Could flexibility on both sides be good enough to bridge the gap? I imagine that writing polite emails to both involved parties might go a long way to fixing your problem. 

It may be that funding restrictions do not allow the PhD offering university to delay by too much. But it may also be that the starting date is flexible on their end. There is no way of knowing before you ask. Ensure that your message clearly indicates that you are overjoyed to accept their offer, but that you do want to do right by this other university that invested resources in you.

Simultaneously, the other university should see that a fully funded 4-year PhD is a better job offer than a one-year internship. So your email to them should express thankfulness for the effort they put into the visa application, but should also indicate that for career purposes you cannot really afford to decline a fully funded 4-year position.

Sketch a scenario where everybody wins. Maybe you can convince the research internship that you can do a great job in their department from January 1 until August 31, and maybe you can convince the other university that a starting date of September 1 is better for all involved. There may be operational constraints that disallow this, but you won't know until you ask.