Gordon Brown signalled a willingness to re-examine the £3,000 cap on tuition fees and to consider tax breaks on endowments for universities.

He spoke at the launch of a pamphlet warning that European institutions must act to stop lagging behind the US.

Britain spends 1.1% of national income on higher education, compared with an EU average of 1.2% and 2.6% in the US.

Mr Brown told an audience of academics and industrialists at 11 Downing Street that this was "not a figure that can stay at that level".

Reassessment

He said he was ready to "enter into the debate" on how funding could be increased from private and public sources.

As part of this he indicated that he would not rule out an eventual reassessment of the £3,000 tuition fee cap, which is set until 2009 but which some universities regard as too low.

He said the principle of top-up fees, which come into effect this autumn, was "the right one", because it ensured that students who benefit from higher education must make a financial contribution towards its cost.

The pamphlet from the Centre for European Reform (CER) says many of Europe's universities are "under-funded", "unreformed" and "stuck in the past".

It calls for improved standards in teaching, more resources for research and more autonomy for universities.

The report also backs the charging of tuition fees, saying this cost forces students to value their education.


'Filling time'

"People do not value free goods or services," say report authors Richard Lambert and Nick Butler.

"It will be less easy for young people to think about higher education as a convenient way of filling time.

"Instead, they will have an incentive to complete their course at a less leisurely pace and they will have to think harder about the costs of dropping out."


The report is critical of Europe's performance on the global market, saying the continent is slipping behind its competitors.

Taken as a group, Europe's universities are "failing to provide the intellectual and creative energy that is required to improve the continent's poor economic performance".


Mr Lambert, who takes over as director general of the Confederation of British Industry in July, and Mr Butler, group vice-president for BP, urge governments to allocate more money to higher education.

EU universities also lacked the tradition of raising money from alumni.


The report says elite universities must be fostered, and calls for the business sector to receive greater incentives to become more involved in higher education.

'Strong track record'

Students and academics should also be encouraged to "move around Europe", strengthening competition among universities and encouraging top researchers to work together, it adds.

Mr Brown said that, as well as driving economic growth through research, universities could become a major earner for the UK by attracting more overseas students.

Higher Education Minister Bill Rammell said: "Universities throughout the EU do need to innovate and reform and we have been at the forefront of making that case within Europe.

"UK universities do have a strong track record in terms of diversity of funding, quality and autonomy which are the kind of innovations we need to see across European universities.

"Our universities are world class. They are rightly renowned for their excellence and attract 200,000 students from overseas making the UK the second most popular destination for students after the USA."

Shadow Higher Education Minister, Boris Johnson, responded: "This is a welcome blast of common sense from Gordon Brown on the question of university finance. It is a blessed relief after the pseudo-egalitarian drivel of his intervention in the Laura Spence affair."


"He is finally getting the message that universities need more freedom, not less."