The EU's financial services sector will lag the United States even further if protectionism in member states goes unchecked, a study.

The report for the City of London Corporation, which runs Europe's largest financial centre, studied the role of wholesale financial services in the EU as the United States consolidates its lead and China and India catch up.

The EU contributes to over half of world trade in the finance and insurance sectors and although the industry has grown faster than most other European sectors its share of the global market is falling, the report said.

In part, this is due to the growth of emerging market economies - particularly China and India. The United States accounts for 39 percent of world wholesale financial services compared with 28 percent for the EU.

In the early 1990s, the EU and United States were on a par.

"The EU has an industry that is a world leader. What this research illustrates is how EU policy makers have it in their power to maintain that position and facilitate the conditions for higher economic growth," said Michael Snyder, policy chairman at the City of London Corporation.

"One example is by ensuring that current protectionist stances in some member states do not prevail," Snyder said.

The EU is at the centre of a debate over protectionism and the European Commission has launched legal action against Poland and Italy for trying to scupper foreign takeover bids in their banking sectors.

Adverse EU regulation will likely cut growth to 2020 in the sector by a third, the report said.

Banks and brokers complain about the costs of complying with EU financial regulation, particularly the markets in financial instruments rules due to come in next year, which will trigger a mini-revolution in business models.

Wholesale finance in the EU is now worth 173 billion euros (120 billion pounds) or 1.6 percent of the bloc's economic output, up from 1.3 percent in 1995.

Under the current regulatory framework, growth in the sector is forecast to slow to 3.5 percent, with all other regions outperforming the bloc, the report said. The report concludes this trend is likely to continue, unless the EU's policies encourage faster growth in the sector.

In real terms, China's wholesale financial sector is growing at nearly three times the pace of the EU's and now accounts for 4 percent of the world market, the report said.

London, Paris and Frankfurt account for 41 percent of the EU financial services sector where wholesale finance is more productive than the rest of the economy.

Britain is the single largest exporter of financial services, accounting for 24 percent of world exports, and accounts for the largest share of EU finance, at 35 percent.

(http://today.reuters.co.uk)