A single financial services market would add up to 1 per cent to growth in the EU's stricken manufacturing sector, according to a European Commission report.

The study, published today, concludes that an EU-wide capital market would enable companies to raise funds more cheaply, spurring economic growth. It comes as Europe's industrial sector is on the verge of a recession. Sluggish growth in manufacturing has been partly responsible for the economic crisis in large EU countries such as Germany and France.

The report is part of a new drive by the Commission to persuade national governments to heal their divisions and agree laws to create a European financial market by 2005. This month, another Commission study said a single financial market would add more than 1 per cent across the EU economy over the next 10 years.

By focusing on manufacturing, the new study seeks to highlight that integrated capital markets would bring benefits to all sectors of the EU economy.

It says that in most EU countries, including Germany and Italy, raising European financial integration to the level seen in the US would add at least 1 per cent to manufacturing growth. Industries in countries such as the UK and the Netherlands, where financial services are more developed, would grow less, resulting in an EU average rise of 0.7 to 0.9 per cent.

The increase would be mainly driven by companies' ability to raise funds at lower prices than at present by exploiting the competition and choice of an EU-wide financial market.

Harmonised accounting standards and improved corporate law would also help manufacturing to grow.

According to the research, prepared for the Commission's economic department, the pharmaceutical, plastic, and office and computing sectors would benefit the most from an integrated financial services market.

Having access to an Europe-wide pool of funds would help small and medium-sized enterprises more than larger companies, which can already tap large markets, the study says.

The Commission's findings are likely to be welcomed by manufacturing companies across the EU, which have been grappling with tough markets and slow growth.

The latest economic data from the EU statistics agency showed that industrial output in the euro zone contracted in the third quarter. Another quarter of falling output would mean that the 12 -nation block had officially entered a manufacturing recession.

Commission officials hope that publicising the benefits to the EU economy of a single financial market would encourage governments to agree important legislation.