Mr Mundell's work on monetary dynamics and optimum currency areas, dating back nearly 40 years, continues to be relevant to policy-makers, most recently in discussions on setting up the single European currency.

A seminal article on currency areas he wrote in 1961 has been credited as being a starting point for the theory behind the euro.

Mr Mundell pictured last year in Tuscany with family

The Royal Swedish Academy of Sciences said his work had inspired generations of researchers.

"Mundell's contributions remain outstanding and constitute the core of teaching in international macroeconomics," it said.

The winner is a professor at New York's Columbia University.

It is the 31st time that the prize for economics - the youngest Nobel - has been awarded.

Changing fashions for award

The BBC's Chris Giles: "Mundell's ideas are used everyday on the stock market"

The five other Nobel awards - for peace, literature, medicine, physics and chemistry - were set up by a foundation after the death of Swedish entrepreneur and inventor Alfred Nobel.

They were first awarded in 1901.

Economics, named as a Nobel memorial prize, was set up by the Swedish central bank in 1968 to commemorate its tricentennial. It was first awarded the following year.

It carries the same cheque - 7.9 million kronor (about $960,000) - as the other prizes.

Interviewed briefly in London on a stop-over on his way to a conference in Sweden on Wednesday Mr Mundell was asked how he might spend the money.

"If I were to say how would I invest a million dollars if I had it, I would put three-quarters into shares and a quarter into bonds," he said.

But, he added: "part of the money will be put into my summer house in Tuscany."

The economics prize has been dominated by the United States - which has been awarded nearly twice as many prizes (28) as the rest of the world put together (15).

The UK has several winners, including James Meade, Sir Richard Stone, and James Mirrlees in 1996.

Last year's winner: Amartya Sen

The most recent winner, Amartya Sen, is also based in the UK, as master of Trinity College, Cambridge, although he was born in India and did much of his professional work, specialising in famine, in the United States.

The prize has been awarded to economists from very different schools of thought, reflecting the changing prevailing fashions.

In its first years, the Nobel Economics prize was awarded to leading Keynesians - such as Paul Samuelson, James Tobin, and Robert Solow. They expanded the picture of how the economy worked first developed by John Maynard Keynes - who believed that government intervention could smooth out the problems of the economic cycle.

Honest government

Later, leading monetarists got a greater share of the Nobel prize - figures like Milton Friedman and Robert Lucas, who developed the "rational expectations" school of economic analysis.

More recently, the areas of interest reflected by the Nobel Economics Prize has shifted again.

On the one hand, experts in financial economics have come into prominence as prize winners.

Another strong direction for recent winners has been those who emphasise the importance of laws and institutions, like property rights and honest government, in shaping economic decisions.

The last and highest profile Nobel award, for peace, will be announced in Oslo on Friday.