The UK could save £4.2 billion over the next seven years by reforming the way European Union (EU) funds are used to support the continent's poorest regions, a report has said.

Britain is the third largest loser, after Germany and France, from the EU's "structural and cohesion fund" arrangements, paying in almost £30 billion over the current budget period of 2007-13 but receiving only £9 billion back.

However, only 70% of the money which Britain gives the fund goes to the poorer EU nations - mostly in Eastern Europe - which are in most need of assistance to catch up economically with the West. The remaining 30% comes back to the UK - and 25% of it to the same region where it was originally raised.

The report by think tank Open Europe said there was a "strong case" for richer EU nations like Britain to continue to subsidise poorer ones.

But it said massive savings could be made on bureaucracy by allowing the UK to operate its own regional policy, rather than sending huge sums to Brussels, only for them to be redistributed to disadvantaged parts of Britain.

Only Cornwall and West Wales gain overall from the current system while other less wealthy areas lose out, found the report. The West Midlands pays £3.55, Merseyside £2.88 and Northern Ireland £1.58 to the structural funds for every £1 they get back.

The report's author, Open Europe analyst Pawel Swidlicki, called on the Government to revive a policy adopted by the previous Labour administration, under which the rich member states would pay for their own regional policies and structural funds would be limited to countries with less than 90% of EU average income.

By doing this, Britain could save up to £4.2 billion over seven years, he said. If reinvested in the regions currently benefiting from structural funds, each region would see its income from grants boosted by around 45%.

Mr Swidlicki said: "Limiting EU regional spending to poorer countries would be a win-win situation for both Britain and Europe.

"It would channel more cash to the newest member states and allow the UK to spend exactly the same amount on its regions as it does now, with the option of adding the several billion that it would save from streamlining the structural funds."